-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IABW3MBXZT425I5nA7SR06W3LDl2qNWOwMo2VFGqqBsvx68CNigU2FK0yxRC0w92 9thlnfU/WnX4teqn8ULTdA== 0000069999-98-000006.txt : 19980427 0000069999-98-000006.hdr.sgml : 19980427 ACCESSION NUMBER: 0000069999-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980424 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03713 FILM NUMBER: 98600316 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER: JANUARY 31, 1998 0-3713 ------------------------ NATIONAL COMPUTER SYSTEMS, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0850527 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11000 PRAIRIE LAKES DRIVE EDEN PRAIRIE, MINNESOTA 55344 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 612/829-3000 ------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Shares--par value $.03 a share (Title of Class) Rights to Purchase Series A Participating Preferred Stock (Title of Class) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. _X_ State the aggregate market value of the voting shares held by non-affiliates of the registrant as of April 17, 1998. Common Shares, $.03 par value -- $ 644,923,000 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of April 17, 1998. Common Shares, $.03 par value - 31,044,252 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended January 31, 1998 are incorporated by reference into Parts I, II and IV. Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS National Computer Systems, Inc. ("NCS" or the "Company") is a global information services company, which provides quality services, software and systems for the collection, management and interpretation of data. The Company's services include data capture and processing, analysis, data management, reporting, network services, software services, hardware maintenance and other professional services to meet customer needs. The Company's application software products are focused on specific applications within targeted markets, particularly K-12 education, where NCS has a substantial presence. NCS systems are used to: capture and aggregate data; create a database or datastream; process the data using proprietary software; and analyze, interpret and report results. Data collection systems include optical mark read and image scanning hardware, other data collection technologies, proprietary software and pre-printed forms. The Company utilizes its own products, as well as other technologies, to provide data collection services to those customers who prefer not to purchase systems for internal use. NCS markets its data collection, management and reporting services and systems within two broad markets: Education and Data Management. EDUCATION NCS develops and markets data collection services and systems which provide optical scanning, image-based or electronic data collection and computer processing services for the high accuracy, large volume, complex processing needs of major test publishers, state education agencies, universities and colleges, and local school districts. NCS also develops and markets enterprise application software for the administration and management of curriculum, student instruction, and financial data at the classroom, school, school district and state levels. In addition to its services for training, consulting and project management NCS, more recently, has offered network services, including design, hardware and software procurement, Internet utilization, maintenance and support, network administration and outsourcing for its K-12 customers. By using the Company's optical scanning and image-based systems and forms, individual school districts can perform in-house student assessment testing applications, including teacher created or administration developed norm- or criterion-referenced tests; administrative applications such as attendance, scheduling, grade reporting and registration; library and inventory management; and financial management and payroll. The Company's information processing services are also provided in support of federal student financial aid programs for post-secondary education. DATA MANAGEMENT NCS develops, markets and manages complex data collection, processing and reporting services and products targeted for certain key applications in the data management market. These applications include sales/marketing applications, such as sales/order entry, billing, quality measurement, product warranty and customer satisfaction surveys and customer data collection; payroll; human resource applications, including applicant tracking, organizational development, employee attitude surveys, benefits enrollment and employee evaluation; telephone equal access balloting; and general data collection, analysis, management and reporting. NCS provides scanners and forms for customers to do their own paper-based data collection. The Company also provides solutions to more complex information management needs through services and products that include comprehensive data collection technologies, software development, telecommunications support and information dissemination systems. All of these processing, data management and reporting services are available from NCS in support of customers that prefer to outsource these services. In addition, NCS offers network design, hardware and software acquisition, implementation, maintenance and support, and network administration. BUSINESS SEGMENT AND OTHER INFORMATION NCS operates in a single business segment. See Note 10 of Notes to Consolidated Financial Statements for business segment data, which financial statements are included in the Annual Report to Stockholders for the fiscal year ended January 31, 1998, and incorporated herein by reference. The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden Prairie, Minnesota 55344, telephone 612/829-3000. PRIMARY PRODUCT AND SERVICE OFFERINGS Assessment and Testing Services NCS is the largest commercial processor of student assessment tests for grades K-12 in the United States. NCS markets test scoring services to major test publishers, state education agencies, the federal government, local school districts and commercial customers. For these customers, NCS service offerings include program design, item development, program management, software development, printing, packaging, distribution and collection logistics, scoring, editing, analysis and final reporting. Scoring services include selected response scoring and professional scoring of constructed response items such as essays. Both optical mark reading (OMR) and image scanning technologies are utilized in the scoring process. The acquisition of Virtual University Enterprises in fiscal 1997 added a secure Internet-based electronic testing delivery capability, thereby allowing NCS to participate in the professional certification market, as well as offer an electronic testing option to traditional statewide grade K-12 testing programs. The Company also publishes and distributes test instruments and provides scoring services to industrial and clinical psychologists, psychiatrists, human resource professionals and educators. These tests and services include personality assessment and psychological diagnostic testing, career development, guidance counseling and human resource organizational assessments. With the acquisition of the London House business from The McGraw-Hill Companies in fiscal 1997, the Company's test and scoring services have expanded to include assessments for personnel selection, skill assessment and workforce development. Enterprise Software for Schools A principal strategy of the Company in servicing the education marketplace is to concentrate on enterprise software for school administration. Software products include student administrative software to assist educators in student management, including such applications as academic reporting, attendance gathering and scheduling. The Company's instructional and curriculum management software products manage information about student achievement against educational objectives. In conjunction with the instructional management software, NCS offers a Model Curriculum and Assessment Database (MCAD) to assist schools in establishing stated curriculum objectives with specific test items to measure progress against those objectives. NCS software products also include financial management software for schools and school districts, which includes accounting and financial reporting, payroll, human resources, inventory and many other financial and administrative functions. The Company offers teacher-training software specifically aimed at improving assessment of writing and composition skills. NCS offers services associated with its enterprise software to assist with the design and implementation of these installations. Services offered by NCS include professional consulting; project management; network planning, design and implementation; systems installation and integration; training; help desk and ongoing support. The Company also offers outsourcing services to install its software and third-party computing and network hardware and operate the system on a day-to-day basis for the school district. Data Management Services NCS provides a comprehensive package of services and products that include systems analysis and design; software development; comprehensive data collection technologies, including paper based and electronic; telecommunication and telephone call center support; information management and dissemination; and network support, including Internet connectivity; and training. These services and products can be delivered on-site or outsourced off-site to NCS. The U.S. Department of Education has outsourced to NCS the processing and eligibility of the free federal application for student aid in post-secondary education, and is the Company's single largest customer. NCS also manages, under contract, the wide area network over which this information is distributed to and from member colleges, universities and other post-secondary institutions. Scanning Products NCS manufactures OMR scanners that can read data from specially designed forms printed by the Company with specifically formulated inks. Computing capability is built into most scanners. Scanners usually incorporate, or interface directly with, software developed by the Company. Optical scanning equipment is most effective for applications where highest accuracy, precise response definition and cost effective data capture is required. The Company's lines of OMR hardware include scanners marketed as OpScan(R) products. These lines of scanners provide a wide range of capabilities to meet the needs of customers. The OMR scanning systems utilize a proprietary mark discrimination system to distinguish valid marks, thus providing a very high degree of accuracy in processing responses. To enhance the usefulness of the OpScan line, the Company offers optional features, such as bar code reading capability, a transport printer to print alphanumeric messages on scanned documents, optional read formats and upgraded computer capability options. NCS markets image-based data collection systems which represent an extension of the Company's optical mark reading technology. These are marketed as NCS(R) products and contain NCS proprietary character recognition technology as well as integrated third-party technologies. When attached to a workstation computer and using sophisticated software, these scanners allow customers to efficiently and accurately collect and interpret a wide range of information from a printed form, including machine- and hand-printed data. NCS offers a number of standard software programs for use with NCS systems. Processing and application software is an important component of its scanning products and services. The Company also offers non-proprietary data collection products and technology to address specific customer data collection needs. Scannable Forms The Company designs, manufactures and sells scannable forms, including multiple-page booklets. A variety of custom forms are produced that are tailored to meet specific customer needs. In addition, standardized forms are used, especially with microcomputer-based scanners, in such applications as testing, attendance, scheduling and student evaluation in the education market or customer surveys or market research in the commercial setting. The Company believes that the use of a properly designed and printed form is an essential element in assuring that a scanning system performs with greatest accuracy and optimum capability. In order to assure a high degree of consistency, reliability and accuracy, NCS has emphasized the use of its forms with its equipment. The Company prints its forms to exacting specifications. MARKETING NCS markets its data collection hardware and software and its data collection and computer processing services directly through sales employees, business partners and original equipment manufacturers and resellers located throughout the United States. Outside the United States, the Company's systems, products and services are sold through sales employees, distributors or independent sales agents. The Company's published test products and related test-scoring services are marketed principally in North America through telemarketing, direct mail, professional journal advertising and professional trade convention attendance and elsewhere through distributors. Each of the Company's sales organizations are supported by marketing and sales support personnel. SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE Software support is provided on a contractual basis to customers licensing application software systems from the Company. NCS assists customers with installation, training, hardware or software upgrades and development of specific customer application software on a fee for service basis. The Company offers technical support and hardware maintenance to customers purchasing or leasing its equipment either on a contractual basis or through its national network of customer service and support engineers. NCS emphasizes prompt, reliable service and close customer relationships. Technical and maintenance support may include labor, parts, operational training and, where applicable, programming of the equipment and design of forms. The Company supports its large scale, complex data management projects with information processing expertise in areas such as needs assessment, software development, data collection technologies, data base management, secure Internet applications, networking, telecommunications, help desk services, system acquisition and implementation and ongoing training and support. DEVELOPMENT OF PRODUCTS AND SERVICES The Company's development efforts are directed toward new product development and enhancements to existing products. During the fiscal years ended January 31, 1998, 1997 and 1996, the Company spent approximately $8.6 million, $9.9 million and $8.5 million, respectively (including certain internally developed, capitalized software development costs). The expenditures relate principally to software product development (primarily focused on applications software) and scanning software and equipment development. See Note 2 to Notes to Consolidated Financial Statements for a description of additional new products and enhancements to existing products acquired through acquisitions, which financial statements are included in the Annual Report to Stockholders for the fiscal year ended January 31, 1998, and incorporated herein by reference. MANUFACTURING The Company assembles its scanning equipment from electronic components, metal stampings, molded plastic parts and mechanical sub-assemblies. These parts are generally available from multiple sources. The Company assembles most of the scanning systems equipment at its Eagan, Minnesota facility. Computer hardware is purchased from other manufacturers. Scannable forms are produced at NCS' printing plants in Columbia, Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The ink and paper used in forms production are produced to the Company's specifications by a limited number of suppliers. Although the Company has no long-term supply contracts with its paper or ink suppliers, the Company has had long-term relationships with such suppliers and believes that these relationships are good. COMPETITION Competition in the data collection and information management industry is intense. Numerous companies offer various combinations of data collection and data management services. Optical scanning and imaging are only two of numerous data collection methods available and successfully in use in the marketplace today. The Company continues to focus on the development of education, government and commercial market niches where scanning technology has advantages over other data entry technologies. In addition to the functional competition provided by alternative methods of data capture (including on-line terminal keyboards and optical character readers), other scanning vendors supply products that directly compete with those of the Company. Enterprise software for the education market is competitive with in-house systems, national and regional software and service providers, data processing service bureaus, test publishers and providers of educational curriculum and instruction management products and services. The Company's scannable forms compete with those produced by commercial and specialized forms printers. Principal competitive factors in the scannable forms printing industry are product quality, service and price. NCS' test processing, test publishing and computer processing services compete with several test publishers and data processing service bureaus. The Company's customer support maintenance organization competes with services provided by manufacturers, other national service companies and local providers of maintenance services. PATENTS, TRADEMARKS AND LICENSES The Company holds certain patents, registered and unregistered trademarks and copyrights. The Company also has rights under licensing arrangements to a number of patents, trademarks, copyrights and manufacturing processes and materials. These licensing arrangements are agreements with publishers of various copyrighted psychological, aptitude and achievement tests that license NCS to distribute these tests, to print and sell answer sheets for such tests, and to score such tests. Payment of royalties is usually based upon the volume of tests distributed, answer sheets sold, and tests scored. NCS believes that its business is not dependent upon any one individual patent, trademark, copyright or license right or group thereof. "OpScan" and "NCS" appearing herein are registered trademarks of the Company. EMPLOYEES As of February 28, 1998, the Company employed approximately 3,500 full-time employees. The Company believes that its employee relations are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of all of the executive officers of the Company as of February 28, 1998 are listed below along with their business experience during the past five years. NAME AGE POSITION - ------------------- -------- ------------------------------------- Russell A. Gullotti 55 Chairman of the Board, President and Chief Executive Officer Robert C. Bowen 56 Senior Vice President Michael C. Brewer 51 Vice President and General Counsel Jay V. Clark 56 Vice President John W. Fenton, Jr. 57 Secretary-Treasurer Clive M. Hay-Smith 40 Vice President Robert C. Hickcox 44 Vice President Gary L. Martini 47 Vice President Michael A. Morache 47 Vice President David W. Smith 53 Vice President Jeffrey W. Taylor 44 Vice President and Chief Financial Officer Adrienne T. Tietz 51 Vice President Mr. Gullotti has been President and Chief Executive Officer since October, 1994 and Chairman of the Board since May, 1995. Prior to that he held senior executive positions in sales and marketing, services and administration with Digital Equipment Corporation (computer manufacturing and services) for more than five years. Mr. Bowen has been a Senior Vice President of NCS for more than five years. Mr. Brewer has been Vice President and General Counsel of NCS since May, 1995. Prior to that he was General Counsel of NCS from May, 1992 until May, 1995 and Associate General Counsel of NCS from May, 1990 until May, 1992. Mr. Clark has been a Vice President of NCS for more than five years. Mr. Fenton has been Secretary-Treasurer of NCS for more than five years. Mr. Hay-Smith has been a Vice President of NCS since December, 1993. Prior to that he was a sales and distribution executive with Control Data Systems, Inc. (computer systems integrator) from March, 1989 to August, 1993. Mr. Hickcox has been a Vice President of NCS since February, 1997. Prior to that he was Director, Methods and Tools of NCS from April, 1995 to February, 1997 and prior to that, Manager, Tools and Systems with Digital Equipment Corporation (computer manufacturing and services) for more than five years. Mr. Martini has been a Vice President of NCS since August, 1997. Prior to that he was owner and President of Martini & Associates (organizational development consulting) for more than five years and was Senior Consultant, Organization Development with Medtronic, Inc. (manufacturer of implantable cardiac devices) from April, 1991 to June 1993. Mr. Morache has been a Vice President of NCS since May, 1996. Prior to that he was a Vice President of Unisys Corporation (information management company) from September, 1995 to May, 1996 and prior to that, a Senior Vice President with ALLTEL Information Services, Inc. (information processing management, outsourcing services and application software) for more than five years. Mr. Smith has been a Vice President of NCS for more than five years. Mr. Taylor has been Vice President and Chief Financial Officer since May, 1994 and prior to that Vice President and Corporate Controller of NCS for more than five years. Ms. Tietz has been a Vice President of NCS for more than five years. Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. PRIVATE SECURITIES LITIGATION REFORM ACT In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing, as Exhibit 99 hereto, cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. ITEM 2. PROPERTIES The Company's principal facilities are as follows: SQUARE LOCATION FOOTAGE GENERAL PURPOSE - --------------- ---------- ------------------------------- Mesa, AZ (1) (2) 40,000 Education software and services general offices, sales and marketing, product development and support Cedar Rapids, IA 205,000 Data processing services and warehouse Iowa City, IA Assessment and test processing Building 1 (1) 168,000 and data processing services, Building 2 (1) 112,000 general offices and operations Lawrence, KS 90,000 Data processing services, general offices and operations Eagan, MN (1) 109,000 Scanner hardware development and manufacturing; NCS services general offices, sales and marketing; customer support services general offices and operations; and international operations general offices, sales and marketing Eden Prairie, MN 45,000 Executive general offices Edina, MN (1) 101,000 Data collection systems and services general offices, data processing services, sales and marketing; and scanner software development Minnetonka, MN (1) 54,000 Test publishing and scoring general offices and operations Owatonna, MN (1) 128,000 Documents design and production Columbia, PA (1) 121,000 Documents design and production Austin, TX Data processing services, Building 1 35,000 general offices and Building 2 41,000 operations Nunawading, Victoria 30,000 NCS Australasia Pty. Ltd, (Melbourne) (joint venture) general Australia (1) offices, data processing services, sales and marketing Rotherham, South Yorkshire 34,000 Documents design and England (1) production, general offices, sales and marketing - -------------------------- (1) Denotes owned facility. (2) Construction of a 56,000 square foot addition to be used for the same general purpose will commence in May, 1998 with completion estimated for the last quarter of 1998. The Company believes that its facilities, with the construction of the addition described above, will be adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS On April 30, 1997, the Company was served with a Summons and Complaint in a lawsuit filed against the Company by Edu-Cap, Inc. (formerly University Support Services, Inc.) ("Edu-Cap") in the United States District Court, District of Minnesota, Fourth Division. See also Item 5 of the Company's Current Report on Form 8-K dated April 30,1997. In the lawsuit, Edu-Cap alleges certain claims against the Company in connection with three student loan processing and servicing agreements between the Company and Edu-Cap. Edu-Cap seeks out-of-pocket damages, an undisclosed amount of lost profits, and has tendered to NCS certain student loans with unpaid principal, interest and late charges, which loans it claims are or have been in default and were incorrectly originated or serviced by NCS. The Company tendered the defense of the claims to its insurer, and the insurer accepted the defense subject to a reservation of rights. The Company has filed an Answer to Edu-Cap's Complaint denying Edu-Cap's claims, and the Company intends to vigorously defend against the lawsuit. In addition, the Company has filed a Counterclaim against Edu-Cap and a claim against a corporation affiliated with Edu-Cap seeking compensatory damages. The case is in the early stages of discovery, and Edu-Cap has not set forth the factual basis for its lost profits claims. The Company does not believe that the outcome in this litigation would result in a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year ended January 31, 1998 to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS "Quarterly Market Data" included in the Annual Report to Stockholders for the year ended January 31, 1998 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA "Five Year Financial Data" included in the Annual Report to Stockholders for the year ended January 31, 1998 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Annual Report to Stockholders for the year ended January 31, 1998 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary data of the registrant and its subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1998 are incorporated herein by reference: Consolidated Balance Sheets -- January 31, 1998 and 1997 Consolidated Statements of Income -- Years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years ended January 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements -- January 31, 1998 Report of Independent Auditors dated March 2, 1998 Quarterly Results of Operations (Unaudited) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "Election of Directors" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 and "Executive Officers of the Registrant" in Part I of this report are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION "Summary Compensation Table" and "Stock Options" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Election of Directors" and "Ownership of NCS Common Stock by Certain Beneficial Owners and Executive Officers" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "Election of Directors" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) List of Financial Statements and Financial Statement Schedules (1) The following consolidated financial statements of National Computer Systems, Inc. and subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1998, are incorporated by reference in Item 8: Consolidated Balance Sheets -- January 31, 1998 and 1997 Consolidated Statements of Income -- Years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years ended January 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements -- January 31, 1998 Report of Independent Auditors dated March 2, 1998 (2) Consolidated financial statement schedules of National Computer Systems, Inc. and subsidiaries required to be filed by Item 14(d): All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Listing of Exhibits: EXHIBIT 3.1 Restated Articles of Incorporation, as amended. 3.2 Bylaws, as amended and restated, are incorporated herein by reference to Exhibit 3.2 to the NCS Form 8-K dated March 4, 1996. 4.1 Instruments with respect to long-term debt where the total debt authorized thereunder does not exceed 10% of the consolidated total assets of the registrant are not being filed; the registrant will furnish a copy of any such instrument to the Commission upon request. 4.2 Amended and Restated Rights Agreement dated as of March 4, 1996 between NCS and Norwest Bank Minnesota, National Association (including the form of Right Certificate attached as Exhibit B thereto) is incorporated herein by reference to Exhibit 1 to Amendment No. 2 to Form 8-A/A dated March 13, 1996. 4.3 Credit Agreement dated as of November 17, 1997 between NCS and The First National Bank of Chicago (as Agent); Norwest Bank Minnesota, National Association; Suntrust Bank, Central Florida, National Association; and The Bank of Tokyo - Mitsubishi Ltd., Chicago Branch is incorporated herein by reference to Exhibit 4 to the Company's Form 10-Q for the quarter ended October 31, 1997. *10.1 Change of Control Agreement dated April 15, 1996, by and between NCS and certain executives of NCS is incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended April 30, 1996. *10.2 NCS 1984 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended July 31, 1984. *10.3 NCS 1986 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10D to the Company's Form 10-K for the fiscal year ended January 31, 1986. *10.4 NCS Non-Employee Director Stock Option Plan, as amended. *10.5 NCS 1990 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.6 NCS 1995 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.7 NCS 1990 Long-Term Incentive Plan, as amended, is incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.8 NCS 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10I to the Company's Form 10-K for the fiscal year ended January 31, 1992. *10.9 Description of Retirement Arrangements with David C. Malmberg is incorporated herein by reference to Exhibit 19 to the Company's Form 10-Q for the fiscal quarter ended October 31, 1992. *10.10 Amended and Restated Severance Agreement dated May 23, 1996, by and between NCS and Russell A. Gullotti is incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended April 30, 1996. *10.11 Agreement dated August 22, 1994 between NCS and Charles W. Oswald is incorporated herein by reference to Exhibit 10(b) to the Company's Form 10-Q for the fiscal quarter ended October 31, 1994. *10.12 Oswald Stock Option Plan is incorporated herein by reference to Exhibit 100 to the Company's Form 10-K for the fiscal year ended January 31, 1995. *10.13 NCS 1997 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.13 to the Company's Form 10-K for the year ended January 31, 1997. *10.14 NCS 1997 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the year ended January 31, 1997. *10.15 NCS Corporate Management Incentive Plan -- 1997 is incorporated herein by reference to Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended January 31, 1997. *10.16 NCS Corporate Management Incentive Plan -- 1998. *10.17 NCS 1998 Employee Stock Purchase Plan 13 Portions of NCS' Annual Report to Stockholders for the fiscal year ended January 31, 1998. 21 Significant Subsidiaries. 23 Consent of Independent Auditors. 24 Power of Attorney authorizing J.W. Fenton, Jr. to sign the NCS Form 10-K for the year ended January 31, 1998 on behalf of other officers and directors. 27 Financial Data Schedules, including Restated Financial Data Schedules for the fiscal year ended January 31, 1997 and 1996 and for the quarterly periods ended April 30, July 31 and October 31 in 1997 and 1996. 99 Cautionary statements identifying important factors that could cause the Company's actual results to differ from those projected in forward looking statements. - ---------------- * Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended January 31, 1998. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules Financial Statement Schedules have been omitted because they are not required or are inapplicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL COMPUTER SYSTEMS, INC. Dated: April 22, 1998 By: /s/ J. W. FENTON, JR. ------------------------ J. W. Fenton, Jr. SECRETARY-TREASURER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By RUSSELL A. GULLOTTI * Chairman of the Board of Directors, ------------------------ President and Chief Executive Russell A. Gullotti Officer(principal executive officer) By DAVID C. COX * Director ------------------------ David C. Cox By MOSES JOSEPH* Director ------------------------ Moses Joseph By JEAN B. KEFFELER* Director ------------------------ Jean B. Keffeler By CHARLES W. OSWALD * Director ------------------------ Charles W. Oswald By STEPHEN G. SHANK * Director ------------------------ Stephen G. Shank By JOHN E. STEURI * Director ------------------------ John E. Steuri By JOHN W. VESSEY * Director ------------------------ John W. Vessey By JEFFREY W. TAYLOR * Vice President and Chief ------------------------ Financial Office (principal Jeffrey W. Taylor financial officer and principal accounting officer) * Executed on behalf of the indicated officers and directors of the registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed attorney-in-fact. /s/ J. W. FENTON, JR. - ----------------------------------- Dated: April 22, 1998 J. W. Fenton, Jr. (ATTORNEY-IN-FACT) FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 EXHIBIT INDEX EXHIBIT - -------- 3.1 Restated Articles of Incorporation, as amended. 10.4 NCS Non-Employee Director Stock Option Plan, as amended. 10.16 NCS Corporate Management Incentive Plan -- 1998. 10.17 NCS 1998 Employee Stock Purchase Plan. 13 Portions of NCS' Report to Stockholders for the fiscal year ended January 31, 1998. 21 Significant Subsidiaries. 23 Consent of Independent Auditors. 24 Power of Attorney authorizing a certain person to sign the NCS Form 10-K for the year ended January 31, 1998 on behalf of other officers and directors. 27 Financial Data Schedules, including Restated Financial Data Schedules for the fiscal years ended January 31, 1997 and 1996 and for the quarterly periods ended April 30, July 31 and October 31 in 1997 and 1996. 99 Cautionary statements identifying important factors that could cause the Company's actual results to differ from those projected in forward looking statements. EX-3.(I) 2 RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF NATIONAL COMPUTER SYSTEMS, INC. (As adopted on January 19, 1968 and amended through March 3, 1998) ARTICLE I The name of this corporation shall be: NATIONAL COMPUTER SYSTEMS, INC. ARTICLE II The registered office of this corporation shall be 11000 Prairie Lakes Drive, Eden Prairie, Minnesota. ARTICLE III This corporation shall have general business purposes and shall have unlimited power to engage in, and to do any lawful act concerning any and all lawful business for which corporations may be organized under the Minnesota business corporation act. This corporation shall have the power to acquire, hold, mortgage, pledge or dispose of the shares, bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. ARTICLE IV This corporation shall have perpetual duration. ARTICLE V (A) The aggregate number of shares which this corporation shall have authority to issue is 110,000,000 shares, divided into 100,000,000 shares of common stock, par value $.03 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. (i) Common Stock. The holders of the common stock shall be entitled to receive, when and as declared by the Board of Directors, out of earnings or surplus legally available therefor, dividends payable either in cash, in property or in shares of the capital stock of the corporation. Each holder of record of the common stock shall have one vote for each share of common stock registered in his name on the books of the corporation and entitled to vote. The common stock shall have no special powers, preferences, or rights, or qualification, limitations or restrictions thereof. (ii) Preferred Stock. Shares of preferred stock may be issued from time to time in one or more series as the Board of Directors may determine, as hereinafter provided. The Board of Directors is hereby authorized, by resolution or resolutions, to provide from time to time for series of preferred stock out of the unissued series of preferred stock not then allocated to any series of preferred stock. Before any shares of any such series of preferred stock are issued, the Board of Directors shall fix and determine, and is hereby expressly empowered to fix and determine, by resolution or resolutions, the designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, including, without limiting the generality of the foregoing, any of the following provisions with respect to which the Board of Directors shall determine to make affirmative provision: (1) The designation and name of such series and the number of shares that shall constitute such series; (2) The annual dividend rate or rates payable on shares of such series, the date or dates from which such dividends shall commence to accrue and the dividend payment dates for such dividends; (3) Whether dividends on such series are to be cumulative or noncumulative, and the participating or other special rights, if any, with respect to the payment dividends; (4) Whether such series shall be subject to redemption and, if so, the manner of redemption, the redemption price or prices and the terms and conditions on which shares of such series may be redeemed; (5) Whether such series shall have a sinking fund or other retirement provisions for the redemption or purchase of shares of such series and, if so, the terms and amount of such sinking fund or other retirement provisions and the extent to which the charges therefor are to have priority over the payment of dividends on, or the making of sinking fund or other like retirement provisions for, shares of any other series or over dividends on the common stock; (6) The amounts payable on shares of such series on voluntary or involuntary dissolution, liquidation or winding up of the affairs of the corporation and the extent to which such payment shall have priority over the payment of any amount on voluntary or involuntary dissolution, liquidation or winding up of affairs of the corporation, on shares of any other series or on the common stock; (7) The terms and conditions, if any, on which shares of such series may be converted into, or exchanged for, shares of any other series or of the common stock; (8) The extent of the voting powers, if any , of the shares of such series; (9) The stated value, if any, for the shares of such series, the consideration for which shares of such series may be issued and the amount of such consideration that shall be credited to the capital account; and (10) Any other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series. The Board of Directors is expressly authorized to vary the provisions relating to the foregoing matters among the various series of preferred stock. All shares of preferred stock of any one series shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be payable and, if cumulative, shall cumulate. Shares of any series of preferred stock that shall be issued and thereafter acquired by the corporation through purchase, redemption (whether through the operation of a sinking fund or otherwise), conversion, exchange or otherwise, shall, upon appropriate filing and recording to the extent required by law, have the status of authorized and unissued shares of preferred stock and may be reissued as part of such series or as part of any other series of preferred stock. Unless otherwise provided in the resolution or resolutions of the Board of Directors providing for the issue thereof, the number of authorized shares of stock of any series of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by resolution or resolutions of the Board of Directors and appropriate filing and recording to the extent required by law. In case the number of shares of any such series of preferred stock shall be decreased, the shares representing such decrease shall, unless otherwise provided in the resolution or resolutions of the Board of Directors providing for the issuance thereof, resume the status of authorized but unissued shares of preferred stock, undesignated as to series. (B) The Board of Directors shall have authority (i) to accept or reject subscriptions for shares of any class, (ii) to allot shares of the corporation from time to time for such considerations in money, property, or both, as may be authorized by law, and (iii) to fix the terms, provisions and conditions of and authorize the issuance of (a) rights to convert any securities of this corporation into shares of any class or classes, including the conversion basis or bases and (b) options to purchase or subscribe for shares of any class or classes, including the option price or prices at which shares may be purchased or subscribed for. (C) No holder of shares of common stock of this corporation shall have any pre-emptive or preferential right of subscription to any shares of stock of the corporation, whether now or hereafter authorized, or to any obligations convertible into shares of the corporation issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its sole discretion, may from time to time determine, and at such price as the Board of Directors from time to time may fix. (D) Cumulative voting by shareholders of this corporation shall not be permitted. ARTICLE VI The amount of stated capital of this corporation at the time of the adoption of these Restated Articles of Incorporation is $8,217.00. ARTICLE VII (A) The management of the business and affairs of the corporation shall be vested in a Board of Directors whose number and membership shall be determined as provided in the By-Laws, subject to applicable provisions of law. The names and addresses of the members of the Board of Directors of this corporation at the time of the adoption of these Restated Articles of Incorporation are as follows: Harlan R. Ward 1015 South Sixth Street Minneapolis, Minnesota Gerald F. Koch 1015 South Sixth Street Minneapolis, Minnesota Edward E. Strickland, Jr. 1015 South Sixth Street Minneapolis, Minnesota Robert F. Zicarelli 1384 Northwestern Bank Building Minneapolis, Minnesota Robert J. McNulty Builders Exchange Building Minneapolis, Minnesota George J. Game 3830 Glenhurst Avenue Minneapolis, Minnesota (B) The Board of Directors shall have authority to adopt, alter and amend By-Laws, subject to the power of the shareholders to change or repeal such By-Laws. ARTICLE VIII The holders of a majority of the outstanding shares of this corporation shall, at any meeting lawfully called for such purpose, have the power to authorize the sale, lease, exchange or other disposition of all or substantially all of the property and assets of this corporation, including its good will, to amend, supplement or restate the Articles of Incorporation of this corporation, and to adopt or reject an agreement of consolidation or merger. ARTICLE IX A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article IX became effective. If the Minnesota Business Corporation Act is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. Any repeal or modification of the foregoing provisions of this Article IX by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. EX-10.4 3 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN EXHIBIT 10.4 NATIONAL COMPUTER SYSTEMS, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. Purpose of Plan This plan shall be known as the "National Computer Systems, Inc. Non-Employee Director Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of the Plan is to promote the interests of National Computer Systems, Inc., a Minnesota corporation (the "Company"), by enhancing its ability to attract and retain the services of experienced and knowledgeable non-employee directors and by providing additional incentive for such directors to increase their interest in the Company's long-term success and progress. Options granted under this Plan shall be nonqualified stock options which do not qualify as incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Stock Subject to Plan Under this Plan, options may be granted for shares of the Company's Common Stock, $03. par value. The Common Stock subject to options shall be either authorized but unissued shares or shares reacquired by the Company. Subject to the adjustment as provided in Section 10 hereof, the maximum number of shares of Common Stock on which options may be exercised under this Plan shall be 200,000 (after giving effect to the 2-for-1 stock split declared in March, 1998) shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. Administration of Plan The Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board shall have the authority, in its discretion, subject to the express provisions of this Plan, to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Board's determinations on the foregoing matters shall be final and conclusive. 4. Eligibility Upon approval of the Plan by the Board of Directors, but subject to approval of the Plan by shareholders of the Company pursuant to Section 13 hereof, each director of the Company who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall automatically be granted, on each date that he or she is elected or reelected as a director of the Company, an option to acquire 3,000 shares of Common Stock under the Plan. 5. Price The option price for all options granted under the Plan shall be the fair market value of the shares covered by the option on the date the option is granted. For purposes of this Plan, the fair market value of the Common Stock on a given date shall be (i) the last trade price of the Common Stock as reported on the NASDAQ National Market System on such date, if the Common Stock is then quoted on the NASDAQ National Market System; or (ii) the closing price of the Common Stock on such date on a national securities exchange, if the Common Stock is then being traded on a national securities exchange. If on the date as of which the fair market value is being determined, the Common Stock is not publicly traded, then the next preceding date on which there was a trade will be used. 6. Term Each option and all rights and obligations thereunder shall, subject to the provisions of Section 8 herein, expire ten years from the date of granting of the option. 7. Exercise of Option (a) Options granted under the Plan shall not be exercisable for a period of six months after date of grant, or until shareholder approval of the Plan has been obtained, whichever occurs later, but thereafter will be exercisable in full at any time or from time to time during the term of the option, subject to the provisions of Section 8 hereof (b) The exercise of any option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. An optionee desiring to exercise an option may be required by the Company, as a condition of the effectiveness of any exercise of an option granted hereunder, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held for his or her own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state securities laws. (c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either (i) in cash (including check, bank draft or money order), or (ii) by delivering the Company's Common Stock already owned by the optionee having a fair market value on the date of exercise equal to the full purchase price of the shares, or (iii) by any combination of cash and the method specified in (ii) of this sentence; provided, however, that an optionee shall not be entitled to tender shares of Common Stock pursuant to successive, substantially simultaneous exercises of options granted hereunder or in any manner tantamount to the technique commonly referred to as "pyramiding." For purposes of the preceding sentence, the fair market value of Common Stock tendered shall be determined as provided in Section 5 hereof as of the date of exercise. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he or she shall possess no rights as a shareholder with respect to such shares. 8. Effect of Termination of Directorship or Death (a) In the event that an optionee shall cease to be a director of the Company for any reason other than his or her gross and willful misconduct or his or her death, such optionee shall have the right to exercise the option at any time within the remaining term of the option. (b) In the event that an optionee shall cease to be a director of the Company by reason of his or her gross and willful misconduct during the course of his or her service as a director of the Company, including but not limited to wrongful appropriation of funds of the Company, or the commission of a gross misdemeanor or felony, any unexercised option granted pursuant to the Plan shall be terminated as of the date of the misconduct. (c) If the optionee shall die and such optionee shall not have fully exercised any option granted under the Plan, such option may be exercised at any time within twelve months after his or her death by the personal representatives, administrators or, if applicable, by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares he or she was entitled to purchase under the option on the date of death, and subject to the condition that no option shall be exercisable after the expiration of the term of the option. (d) Nothing in this Plan or in any agreement hereunder shall confer on any optionee any right to continue as a director of the Company or affect in any way any legal rights with respect to termination of such directorship or removal of such optionee as a director. 9. Non-Transferability No option granted under the Plan shall be transferable by optionee, otherwise than by will or the laws of descent or distribution as provided in Section 8(c) herein. During the lifetime of an optionee, the option shall be exercisable only by such optionee. 10. Dilution or Other Adjustments If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares subject to outstanding options and the exercise prices thereof in order to prevent dilution or enlargement of option rights. 11. Amendment or Discontinuance of Plan The Board of Directors may amend or discontinue the Plan at any time subject to applicable law and regulations. The Board of Directors shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option. 12. Effective Date and Termination of Plan (a) The Plan was approved by the Board of Directors on February 27, 1989, and shall be approved by shareholders of the Company within 12 months thereafter. (b) Unless the Plan shall have been discontinued as provided in Section 11 hereof, the Plan shall terminate on January 31, 1999. No option may be granted after such termination, but termination of the Plan shall not without consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. - ---------------- Plan approved by stockholders on May 25, 1989. Plan amended by directors on February 1, 1997. Plan amended by directors on March 3, 1998. EX-10.16 4 CORPORATE MANAGEMENT INCENTIVE PLAN EXHIBIT 10.16 NATIONAL COMPUTER SYSTEMS MANAGEMENT INCENTIVE PLAN 1998 It is NCS' intent to compensate its senior management employees in a manner which permits the Corporation to attract, retain, and motivate outstanding people. The NCS Management Incentive Plan (MIP) is designed to reward key senior managers for achieving specific annual NCS financial goals and for individual performance in accomplishing these goals. It aligns the interests of NCS senior management with NCS business and financial plans. PLAN ELIGIBILITY Participation in the plan is determined by position. Eligible positions and target incentive amounts are determined each year and may change from year to year. Participants must be full-time NCS employees. Eligibility is limited and includes those positions which significantly impact financial results. The eligible positions and participants will be reviewed and approved annually by the CEO. Positions and participants in the plan will be selected from the following: - CEO - Corporate staff officers - NCS Business presidents, senior vice presidents and, on a selected basis, their management reports - Selected other vice presidents - Selected key employees Any position or participant exceptions, exclusions, and inclusions to the above must be documented and approved by the CEO. TARGET INCENTIVE OPPORTUNITY Each approved position will be eligible for a specific target incentive award. This target incentive opportunity will be a percentage of the May 31, 1998 annual base salary for the participant. The target incentive is tied directly to the participant's business unit financial performance and an overall evaluation of each individual's performance. Potential earned payouts range from 0% at threshold minimum, 100% at target performance, up to a pre-defined overachievement percentage for each participant at maximum. INCENTIVE COMPONENTS The potential target incentive opportunity will be based on achievement of financial goals and the overall evaluation of the participant's performance during the fiscal year. The overall evaluation will include performance against defined individual objectives and a subjective evaluation of performance relative to the following criteria: 1. What have you done to improve shareholder value? 2. How have you improved customer satisfaction and NCS' ability to serve the customer? 3. What have you done to improve the quality/predictability of your business? 4. What have you done to develop your organization? 5. How have you demonstrated personal leadership and corporate-wide perspectives/orientation? No incentive award payouts will be made to participants for achievement of the financial performance if the individual's operating unit (NCS Business or Division or Market Unit) does not meet its minimum profit contribution objective(s). For example, a division participant can receive an incentive award payout only if the division achieves its minimum profit contribution threshold. DETERMINATION OF AWARDS Generally speaking, actual financial results will not include extraordinary gains or losses. In any such matters, including acquisitions, the CEO will make the appropriate approval decisions. PAYOUTS AND PRO-RATA AMOUNTS Earned award payouts will be made no later than April 15 following the end of the fiscal plan year. Any participant must be a full-time employee and be actively employed by NCS on the last day of the fiscal year to be eligible to receive a payout. In coming into or out of an MIP eligible position, participants will be given pro-rata earned award payouts based on the length of time in such position, however, participants must be in the plan at least six full months during the fiscal year to be eligible to receive any pro-rata award. Pro-rata payouts will be subject to review and approval by the CEO. DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES In the case of disability, death, or other special circumstances impacting a plan participant, the CEO may approve pro-rata award payouts. PLAN EXCEPTIONS AND ADMINISTRATION Exceptions and/or modifications to the plan must be approved by the CEO. All decisions made are final. DISCLAIMER Participation in this plan is not to be considered as an employment contract or agreement by the participant. EX-10.17 5 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.17 NATIONAL COMPUTER SYSTEMS, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN ------------------------------- Section 1. Purpose 1.1 The purpose of the National Computer Systems, Inc. 1998 Employee Stock Purchase Plan is to give employees an opportunity to share in the ownership of National Computer Systems, Inc. through a regular and systematic purchase program from current income by payroll deduction. Section 2. Definitions 2.1 For the purpose of the Plan, the following terms will have the meanings set forth below: a. Plan. The term "Plan" shall mean the National Computer Systems, Inc. 1998 Employee Stock Purchase Plan, the terms and provisions of which are set forth herein. b. NCS. The term "NCS" will mean National Computer Systems, Inc., a Minnesota corporation, and all wholly-owned subsidiaries. c. Stock. The term "Stock" shall mean the common stock of National Computer Systems, Inc. d. Participant. The term "Participant" shall mean an employee of NCS who has authorized payroll deductions in the manner set forth in the Plan. Each Participant shall have the same rights and privileges as every other Participant. e. Current Compensation. The term "Current Compensation" shall mean gross earnings of each Participant paid by NCS to such Participant before any withholding deductions have been made. f. Purchase Period. The term "Purchase Period" shall mean any fiscal quarter ending on April 30, July 31, October 31 and January 31. g. Enrollment Form. The term "Enrollment Form" shall mean the Employee Stock Purchase Enrollment Form which an eligible employee uses to elect to participate in the Plan and to authorize payroll deductions. h. Fair Market Value. The term "Fair Market Value" shall be the last sale price on any business day as reported by NASDAQ. i. Stock Purchase Account. The term "Stock Purchase Account' shall mean the individual account established by NCS to which payroll deductions are credited under the Plan. j. Regular Employee. The term "Regular Employee" means all employees of NCS (including officers and directors who are also employees), except employees who are classified by NCS as temporary employees whose customary employment is for not more than 5 months in any calendar year. Section 3. Eligible Employees 3.1 All Regular Employees of NCS shall be eligible to participate in the Plan on employment by NCS. 3.2 No employee shall be granted any option hereunder if such employee, immediately after the option is granted, would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of NCS or of its parent or subsidiary corporation. Section 4. Election to Participate 4.1 An eligible employee may elect to participate in this Plan by completing an Enrollment Form and submitting it to the NCS Corporate Secretary. 4.2 Participation in the Plan will begin as soon as practicable after receipt of the Enrollment Form by the NCS Corporate Secretary. 4.3 Participation in the Plan on the part of the Participant is voluntary and such participation is not a condition of employment, nor does participation in the Plan entitle a Participant to be retained as an employee. Section 5. Purchase Price 5.1 The purchase price for each share of Stock will be the lesser of the following: a. 85% of Fair Market Value on the first business day of each Purchase Period; or b. 85% of Fair Market Value on the last business day of each Purchase Period. Section 6. Payroll Deductions 6.1 A Participant may elect payroll deductions in whole percentages from two to ten percent of Current Compensation. 6.2 A Participant may elect at any time, but only once in any six-month period, to increase or reduce the amount of the payroll deduction within the limitations of Section 6.1 by submitting a new Enrollment Form with the payroll deduction portion completed. The effective date of the change will be as soon as practicable after receipt of the Enrollment Form by the NCS Corporate Secretary. 6.3 Payroll deductions will be credited to the Participant's Stock Purchase Account on each payroll payment date. Section 7. Stock Purchase Account 7.1 All funds withheld from a Participant's Current Compensation in accordance with the payroll authorization shall be credited to the Participant's Stock Purchase Account. A Participant may not make any separate cash payments into the Participant's Stock Purchase Account. 7.2 At the end of each Purchase Period, the largest whole number of shares of Stock that can be purchased will be purchased for each Participant who has not withdrawn from the Plan. The purchase amount, calculated in accordance with Section 5.1, will be charged to the Participant's Stock Purchase Account. 7.3 Excess funds remaining in a Participant's Stock Purchase Account after purchase of Stock because the amount of such excess is insufficient to purchase one whole share of Stock will remain in the Stock Purchase Account. Excess funds remaining in the Participant's Stock Purchase Account for any other reason will be returned to the Participant after the end of each Purchase Period, but in no case more than thirty days after the end of the Purchase Period. 7.4 Each Participant will be provided an accounting of the Participant's Stock Purchase Account as soon as practical after the end of each Purchase Period, but in no case more than thirty days after the end of the Purchase Period. 7.5 No Participant shall be permitted to purchase Stock under this Plan (and any other employee stock purchase plan maintained by NCS and its parent or subsidiary corporations, if any) at a rate which exceeds $25,000 in Fair Market Value of capital Stock (determined at the time the option is granted) for each calendar year in which such option granted to such Participant is outstanding at any time. Section 8. Stock Certificates 8.1 As soon as practical after the end of each Purchase Period, NCS will deliver to Participants certificates representing the shares of Stock purchased. 8.2 NCS will not be required to issue or deliver any certificate for Stock purchased under this Plan prior to registration under the Securities Act of 1933, or registration or filing under any state law, if such registration or filing is required. NCS will use its best efforts to accomplish such registrations or filings, including amendments thereto, but delivery of Stock by NCS may be deferred until required registrations or filings are accomplished. 8.3 A Participant shall have no interest in the Stock until certificates for such Stock are issued. 8.4 All certificates issued under the Plan shall be registered in the name of the Participant or jointly in the name of the Participant and another person, as the Participant may direct by completing the Enrollment Form. Section 9. Withdrawal or Termination 9.1 A Participant may at any time by written notice withdraw from the Plan. Once a Participant withdraws from the Plan, that Participant shall not be eligible to reenter the Plan for a period of six months. 9.2 Payroll deductions will cease upon notice of withdrawal except that a deduction will be made on the next unpaid payroll where the withdrawal notice is received after the cut-off date for changes to such payroll. 9.3 Participation under the Plan will cease upon the date of termination from employment or death. 9.4 Funds accumulated in the Stock Purchase Account of a Participant who has withdrawn from the Plan or has terminated participation under the Plan, in accordance with Sections 9.2 and 9.3, will be held in the Account until the end of the current Purchase Period. At that time the funds will be paid to the Participant within thirty days after the end of the Purchase Period; however, if a Participant's withdrawal or termination is at the end of the current Purchase Period so that funds were withheld from the last payroll of the current Purchase Period, Stock will be purchased to the extent possible in accordance with Section 7.2 before remaining funds are paid to the Participant. 9.5 Approved leaves of absence shall not be deemed a termination of employment for purposes of Section 9. 9.6 A Participant may designate in writing to the Corporate Secretary the Beneficiaries to receive any distribution under the Plan in the event of the Participant's death. If no beneficiary is named, the distribution will be paid to the first of the following classes of persons in which there is anyone living (and if there are more than one living in such class, then in equal shares to them): Participant's widow or widower Participant's surviving issue (per stirpes and not per capita) Participant's surviving parents Participant's surviving brothers and sisters Executor or administrator of Participant's estate Section 10. Transferability 10.1 Any and all rights a Participant may have under this Plan may not be assigned, transferred, pledged or hypothecated (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation, other disposition of such rights, or levy or attachment or similar process shall be null and void and without effect. Only the Participant may purchase stock under the Plan. 10.2 The funds accumulated in the Stock Purchase Account may not be assigned, transferred, pledged or hypothecated in any way, and any attempted assignment, transfer, pledge, hypothecation or other disposition of the funds accumulated in the Stock Purchase Account shall be null and void and without effect. Section 11. Effective Date and Amendment or Termination of Plan 11. The Plan was adopted by the Board of Directors of NCS on March 3, 1998. The Plan must be approved by the Shareholders of NCS at their Annual Meeting to be held on May 21, 1998. This 1998 Plan will become effective for the Purchase Period beginning May 1, 1998. Should approval not be granted this Plan will terminate and all funds held in Stock Purchase Accounts will be refunded to Participants. 11.2 The Plan shall automatically terminate on January 31, 2008 unless extended by the Board of Directors. The Board of Directors may by resolution extend the Plan for one or more additional periods of five years each. 11.3 The Board of Directors may at any time terminate or amend the Plan except that no amendment shall be made without prior approval by the Shareholders which would authorize the sale of more than an aggregate of 500,000 shares of Stock, (after giving effect to the 2-for-1 stock split effected in the form of an 100% stock dividend as approved by the NCS Board of Directors on March 3, 1998), except as provided in Section 13. 11.4 Upon termination of the Plan, the accumulated funds in each Participant's Stock Purchase Account will be used to purchase the largest number of whole shares of Stock as possible. Any balance remaining after said purchase shall be refunded to the Participant. Section 12. Administration 12.1 The Plan shall be administered by the NCS Board of Directors. In administering the Plan, it will be necessary to follow various laws and regulations. The Board of Directors may from time to time interpret the Plan to conform with the law, to meet special circumstances not anticipated or covered in the Plan, or to carry on successful operations of the Plan. Determinations as to the interpretation and operation of this Plan shall be final and conclusive. 12.2 No charge will be made by NCS against the funds received from each Participant for purchase of Stock under the Plan. 12.3 All expenses and fees incurred by NCS in the administration of this Plan will be borne by NCS. However, all brokerage fees or other expenses incurred by a Participant in selling or otherwise transferring shares of Stock will be borne by the Participant. Section 13. Adjustment in Shares Available under the Plan, Merger or Consolidation 13.1 If the outstanding shares of Stock are increased, decreased, changed into or exchanged for a different number or kind of shares of securities of NCS, or shares of a different par value or without par value, through split, amendment to NCS' Articles of Incorporation, or reverse stock split, an appropriate or proportionate adjustment shall be made in the maximum number and/or kind of securities to be sold under this Plan with a corresponding adjustment in the purchase price to be paid for each share to be purchased under this Plan. 13.2 If NCS is merged into or consolidated with one or more corporations during the term of the Plan, appropriate adjustments shall be made to give effect thereto on an equitable basis in terms of issuance of shares of the corporation surviving the merger or the consolidated corporation, as the case may be. Section 14. Stock to Be Sold 14.1 Stock to be issued and sold under the Plan will be unissued stock. 14.2 The number of shares of Stock to be sold under the Plan shall not exceed 500,000 shares, except as provided in Section 13. If such limitation would otherwise be exceeded at the end of a Purchase Period the remaining shares of Stock will be allocated to Participants pro-rata on the basis of the funds in each Stock Purchase Account. Section 15. Funds in Stock Purchase Account 15.1 The funds in the Participant's Stock Purchase Account, after receipt by NCS, shall be under the direction of NCS and applied to the payment of stock purchased or refunded to the Participant in accordance with the Plan as set forth herein. 15.2 Funds held by NCS in the Stock Purchase Accounts are held for the benefit of the Participants but may be commingled with other NCS funds. 15.3 No interest will be accumulated or paid by NCS on funds held in the Stock Purchase Accounts. Section 16. Construction; Notices 16.1 NCS intends that the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended, if approved by the NCS Shareholders; therefore, the Plan shall be construed in a manner consistent therewith if so approved. All Participants shall have the same rights and privileges consistent with the terms of the Plan. 16.2 Notices to the Board of Directors shall be addressed as follows: National Computer Systems, Inc. Attention: Corporate Secretary 11000 Prairie Lakes Drive P.O. Box 9365 Minneapolis, MN 55440 EX-13 6 REPORT TO STOCKHOLDERS
EXHIBIT 13 FIVE YEAR FINANCIAL DATA (Dollars in thousands, except per share amounts) YEAR ENDED JANUARY 31, ----------------------------------------------------------- 1998 1997(2) 1996 1995(3) 1994(4) -------- -------- -------- -------- -------- Financial Results Revenues $406,015 $331,159 $300,883 $284,874 $257,813 Income from operations 43,044 26,646 30,704 20,323 17,318 Income from continuing operations before income taxes 41,975 26,533 27,760 16,119 16,733 Income from continuing operations 25,175 13,666 16,580 11,281 9,744 Discontinued operations, net of taxes - (2,229) 5,679 2,117 (12,253) Gain on disposition, net of taxes - 38,143 - - - Net income (loss) 25,175 49,580 22,259 13,398 (2,509) Income per share from continuing operations(1) Basic earnings per share $ 0.83 $ 0.45 $ 0.54 $ 0.38 $ 0.32 Diluted earnings per share $ 0.80 $ 0.44 $ 0.53 $ 0.37 $ 0.31 Dividends paid per share $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 Financial Position Total assets 315,414 273,920 219,724 209,375 194,833 Long-term debt, including current maturities 18,844 20,148 27,008 49,864 47,351 Stockholders' equity 193,994 170,034 128,198 113,123 100,147 (1) All references to share and per share data have been adjusted to give retroactive effect to the 2-for-1 stock split declared in March 1998. (2) Includes an acquisition related charge of $7,895 pre-tax, $6,992 after tax or $.23 per diluted share. (3) Includes a special charge of $8,164 pre-tax, $3,252 after-tax or $.11 per diluted share. (4) Includes a special charge of $2,200 pre-tax, $1,364 after-tax or $.04 per diluted share.
STOCK EXCHANGE LISTING Common Stock of National Computer Systems, Inc. trades on the Nasdaq Stock Market(TM) under the symbol "NLCS"and is listed in the newspaper stock tables as NtCptr or NtlCptrSys. QUARTERLY MARKET DATA NCS had approximately 2,000 and 1,900 Common Stockholders of record as of January 31, 1998 and 1997, respectively. Fiscal Year 1997 ----------------------------------------- Three Months Ended ----------------------------------------- Year Ended January 31, 1998 April 30 July 31 October 31 January 31 - --------------------------- -------- ------- ---------- ---------- High $13.37 $14.75 $19.75 $19.50 Low 11.37 12.50 13.75 15.50 Close 12.56 13.75 19.00 17.12 Dividends per share 0.045 0.045 0.045 0.045 Fiscal Year 1996 ----------------------------------------- Three Months Ended ----------------------------------------- Year Ended January 31, 1997 April 30 July 31 October 31 January 31 - --------------------------- -------- ------- ---------- ---------- High $11.81 $12.62 $11.62 $13.25 Low 9.00 9.62 9.69 10.00 Close 10.87 10.12 10.75 12.22 Dividends per share 0.045 0.045 0.045 0.045 QUARTERLY RESULTS OF OPERATIONS (unaudited) (Dollars in thousands, except per share amounts) Three Months Ended ---------------------------------------------- April 30 July 31 October 31 January 31 -------- ------- ---------- ---------- Year Ended January 31, 1998 Revenues $78,971 $96,029 $115,387 $115,628 Gross profit 30,811 38,067 40,743 44,817 Income from continuing operations 4,048 7,011 6,026 8,090 Net income 4,048 7,011 6,026 8,090 Basic earnings per share $ 0.13 $ 0.23 $ 0.20 $ 0.27 Diluted earnings per share $ 0.13 $ 0.22 $ 0.19 $ 0.26 Year Ended January 31, 1997 Revenues $70,507 $80,864 $ 88,783 $ 90,905 Gross profit 26,738 31,288 28,645 32,087 Income from continuing operations 3,201 5,893 4,950 (378)(2) Net income 2,831 42,177(1) 4,950 (378)(2) Basic earnings per share: Continuing operations $ 0.11 $ 0.19 $ 0.16 $ (0.01) Discontinued operations (0.01) (0.06) - - Gain on disposition - 1.26 - - ------- ------- ------- ------- Net income $ 0.10 $ 1.39 $ 0.16 $ (0.01) ======= ======= ======= ======= Diluted earnings per share: Continuing operations $ 0.10 $ 0.19 $ 0.16 $ (0.01) Discontinued operations (0.01) (0.06) - - Gain on disposition - 1.22 - - ------- ------- ------- ------- Net income $ 0.09 $ 1.35 $ 0.16 $ (0.01) ======= ======= ======= ======= (1) Includes a gain on disposition, net of taxes, of $38,143 or $1.22 per diluted share. (2) Includes an acquisition related charge of $6,992 after tax or $.23 per diluted share. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fiscal years referenced herein are as follows: Fiscal Year Year Ended ----------- ---------- 1997 January 31, 1998 1996 January 31, 1997 1995 January 31, 1996 Income and Expense Items as a Percentage of Revenues Fiscal Year 1997 1996 1995 - ------------------------------------------------------------ Revenues Information services 48.2% 47.6% 43.4% Product sales 39.9 40.5 43.4 Maintenance and support 11.9 11.9 13.2 - ------------------------------------------------------------ Total revenues 100.0 100.0 100.0 Costs of Revenues (1) Cost of information services 76.7 78.5 77.0 Cost of product sales 42.0 46.3 46.9 Cost of maintenance and support 69.5 67.4 69.0 - ------------------------------------------------------------ Total gross profit 38.0 35.9 37.1 Operating Expenses Sales and marketing 14.0 12.5 12.8 Research and development 2.1 3.0 2.8 General and administrative 11.3 10.0 11.3 Acquisition related charges - 2.4 - - ------------------------------------------------------------ Income from operations 10.6 8.0 10.2 Income from continuing operations before income taxes 10.3 8.0 9.2 Income from continuing operations 6.2% 4.1% 5.5% ============================================================ (1) As a percentage of the respective revenue caption. National Computer Systems, Inc. (the Company or NCS) is an information services company, providing software, services and systems for the collection, management and interpretation of data. The Company markets these products and services predominantly in education, but also to business, government and other markets through its various operating units. RECAP OF 1997 RESULTS Total revenues increased 22.6% in fiscal 1997 to $406.0 million compared to last year's $331.2 million, with approximately half of the increase attributable to acquisitions. Refer also to Note 2 of Notes to Consolidated Financial Statements for further discussion of acquisitions. The Company's overall gross margin on revenues increased $35.7 million to 38.0% as a percentage of total revenues, versus last year's gross margin percentage of 35.9%. Operating expenses, however, increased to 27.4% of revenues in fiscal 1997, compared to 25.5% of revenues in fiscal 1996, before acquisition related charges. These year-to-year margin and expense increases were partially caused by the acquired businesses, as they are predominantly intellectual property businesses (software and assessment products) with higher gross margins and higher operating expenses, relative to the remainder of the Company. Nonetheless, overall operating margins increased to 10.6% of revenue in fiscal 1997 from 10.4% in fiscal 1996 and operating income in dollars increased 24.6% to $43.0 million. Income tax rates were consistent with the prior year before the effects of the special items described below. Income from continuing operations in fiscal 1997 totaled $25.2 million or $0.80 per diluted share outstanding. This compares to a fiscal 1996 pro forma income from continuing operations of $20.7 million and $0.67 per diluted share. In fiscal 1996, the reported net income of $1.59 included a significant one-time net gain on the disposition of the Company's Financial Systems business and a special charge related to the acquisition of Macro Educational Systems, Inc. (Macro). A reconciliation of diluted earnings per share follows: 1997 1996 1995 ----- ----- ----- Earnings per share, as reported $ .80 $ 1.59 $ .71 Less gain on disposition and discontinued operations - (1.15) (.18) ----- ----- ----- Continuing operations .80 .44 .53 Plus acquisition related charges - .23 - ----- ----- ----- Pro forma earnings per share $ .80 $ .67 $ .53 ===== ===== ===== During fiscal 1996, the Company sold its Financial Systems business. See Note 3 of Notes to Consolidated Financial Statements for further discussion on the sale, the gain on disposition and discontinued operations. The following discussion relates to continuing operations only. REVENUES Fiscal 1997 versus Fiscal 1996. Total revenues for fiscal 1997 were up 22.6% to $406.0 million from $331.2 million in fiscal 1996, with approximately half of the year-on-year revenue growth due to acquisitions. The exact annual growth in revenues attributable to acquisitions is impracticable to determine due to the total integration of many of these operations into existing Company operations, the elimination of duplicate or overlapping product lines, and the packaging of existing and acquired offerings into new offerings not previously possible. By revenue category, fiscal 1997 compares to fiscal 1996 as follows: Information services + 24.3% Product sales + 20.7% Maintenance and support + 22.1% The growth in information services came from several sources, both internal and acquired, but most significantly from the Company's international business, where acquisitions in Australia and Canada, as well as significant internal growth in Mexico, contributed approximately one-third of the total growth. Testing and assessment services and services related to the Company's education software also contributed significant year-on-year revenue growth. The growth in product sales, as well as the related support revenues, were due primarily to growth in licensing of the Company's enterprise software for schools, which realized 150% year-on-year growth. Products and technologies acquired during the past two years made large contributions to this growth. Sales of assessment instruments also contributed to the growth in product sales, as a result of the acquisition of the London House product line. By market, the Company's revenues from the Education market grew approximately 29% in fiscal 1997, and account for over 70% of total revenue. Large Scale Data Management (non-education) grew just under 10% year-on-year. Fiscal 1996 versus Fiscal 1995. Total revenues for fiscal 1996 were up 10.1% to $331.2 million from $300.9 million in fiscal 1995. By revenue category, fiscal 1996 compares to fiscal 1995 as follows: Information services + 20.8% Product sales + 2.7% Maintenance and support - 0.8% The growth in information services revenues is predominantly the result of significantly higher volumes of educational assessment services and international service business. During fiscal 1996, the Company invested in two small international businesses, principally service in nature, and NCS was awarded a new long-term service contract in Mexico. These transactions fueled the Company's growth in the international service business. Overall, international revenues were up 42.1% from fiscal 1995. Product sales increases were essentially due to higher education administrative software and scannable forms revenues. These improvements, however, were somewhat offset by lower proprietary hardware revenues. Maintenance and support revenues were down 0.8% due to lower third-party hardware maintenance revenues, partially offset by higher software support revenues. COST OF REVENUES AND GROSS PROFITS Fiscal 1997 versus Fiscal 1996. The Company's overall gross margin as a percentage of revenue improved to 38.0% in fiscal 1997 compared to 35.9% in fiscal 1996. The most impactive factor in this fiscal 1997 improvement is the greater volumes and higher margins of education software products, and, to a lesser extent, the increase in sales and margins of assessment instruments. In both instances, the gross margin on incremental sales is quite favorable. Gross margins on information services also improved slightly in fiscal 1997 due to a number of contributing factors. Gross margins on maintenance and support declined slightly in fiscal 1997, due to a greater complement of software support, carrying a lower margin compared to hardware maintenance. Fiscal 1996 versus Fiscal 1995. The Company's overall gross profit dollars increased $7.0 million or 6.3% with the largest increases being in state educational assessments, international services and education administrative software. As a percent of revenue, overall gross profit declined to 35.9% of total revenues from 37.1% in fiscal 1995, principally reflecting the Company's revenue growth in information services revenues. Gross profit changes by revenue category were largely offsetting, however the gross profit on information services revenues did decline due to lower first year margins on multi-year federal student financial aid contracts. OPERATING EXPENSES Fiscal 1997 versus Fiscal 1996. The overall growth in operating expenses in fiscal 1997 over fiscal 1996 is heavily impacted by the Company's 1997 acquisitions. Beyond the increase in operating expenses due simply to added volume, these businesses by their nature (intellectual property licensing and sales, mainly software and assessment instruments) carry higher gross margins and higher operating expense percentages compared to the rest of the Company. Therefore, sales and marketing and general and administrative expenses increased not only in dollars, but as a percentage of revenues in fiscal 1997. Research and development expenses declined nominally in 1997 as certain of the acquisitions offset the need for internal research and development spending and allowed faster time to market. Fiscal 1996 versus Fiscal 1995. Sales and marketing expenses increased by $2.7 million or 7.0% in fiscal 1996 from the prior year. The year-to-year increase is primarily the result of additional expenditures in introducing and selling new image processing systems to the marketplace. Research and development expenses increased $1.4 million in fiscal 1996 over fiscal 1995. This increase relates principally to enhancements to the Company's scanning and imaging technology and school administrative software. General and administrative expenses decreased by $.9 million or 2.7% in fiscal 1996 from the prior year. As a percent of revenues, these expenses declined by 1.3 percentage points, to 10.0% of total revenues. The decrease reflects specific emphasis on reducing general and administrative expenses, and is net of a $1.0 million increase in expenses to upgrade the Company's internal information systems. IMPACT OF YEAR 2000 Some of the older software in use today was written using two digits rather than four to define the applicable year. As a result, those computer programs have date-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company has substantially completed an assessment of both its product software and internal business systems and will have to modify or replace portions of that software so that it will function properly with respect to dates in the year 2000 and thereafter. The Company spent approximately $1.5 million in fiscal 1997 on assessment and modification of this software. It expects to spend approximately $11.5 million toward this end in fiscal 1998, which should allow the Company to complete the majority of the estimated effort. Approximately $4.0 million of this amount is incremental expenditure and the remainder represents the redirection of existing resources. The Company expects fiscal 1999 expenditures to be significantly reduced from that of fiscal 1998. All amounts are being expensed currently, and are included in the Company's future operating plans and expectations. The Company has also made, and will continue to make, significant capital investments in its internal administrative and service delivery systems and infrastructure (see Capital Resources and Liquidity below), though these investments are not driven principally by year 2000 considerations. The Company has also completed an assessment of its customers, suppliers and other vendor relationships to identify year 2000 exposures and will be working with these entities to mitigate or eliminate them. The costs and timing of the project are based on management's best estimates, which were derived utilizing numerous assumptions of future events; as a result, there can be no guarantee that these estimates will be achieved. While the Company believes it can address the year 2000 issues under its control in time to prevent any material impact on its operations, there can be no guarantee that the Company's customers and suppliers can do likewise, which in turn could have an adverse impact on the Company. Contingency plans will be developed, where necessary, so that the Company's operations will not be materially affected by the year 2000. OTHER SIGNIFICANT TRANSACTIONS During fiscal 1996, in conjunction with the acquisition of Macro, NCS recorded one-time charges totaling $7.9 million, including $5.6 million of purchased research and development plus $2.3 million of acquisition related costs. INTEREST EXPENSE Interest expense decreased slightly in fiscal 1997 from fiscal 1996 due to slightly lower average borrowing levels. Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995, also the result of lower borrowing levels. See Capital Resources and Liquidity below for further discussion of cash flow and debt. OTHER INCOME AND EXPENSE Other income in fiscal 1997 decreased due to lower invested cash balances as $48.8 million was used to fund the aforementioned acquisitions. Other income in fiscal 1996 includes interest income of $2.8 million principally from investment of the proceeds from the sale of the Company's Financial Systems business, and also from internally generated cash flows. Other income and expense for 1995 included no large or unusual items. INCOME TAXES The effective income tax rate was 40.0%, 48.5% and 40.3% for fiscal 1997, 1996 and 1995, respectively. See Note 6 of Notes to Consolidated Financial Statements for a reconciliation to the statutory rate. The effective income tax rate for fiscal 1996 was higher than the statutory rate primarily as a result of the one time write-off of non-deductible purchased research and development. CAPITAL RESOURCES AND LIQUIDITY The Company began fiscal 1997 with $58.1 million of cash and cash equivalents, due largely to the 1996 divestiture of its Financial Systems business. During fiscal 1997, the Company further generated $49.5 million of cash from operating activities. Cash was used for acquisitions of $48.8 million, including $13.6 million to repurchase shares in the open market to offset shares issued to effect the acquisition of Virtual University Enterprises. Further, $25.2 million was used for property, plant and equipment acquisitions including a new Company-owned facility in Melbourne, Australia and the outfitting of new leased facilities in Cedar Rapids, Iowa and Lawrence, Kansas. Investments totaling $7.1 million were made in internal administrative and service delivery systems during fiscal 1997. Debt repayments were nominal and the Company paid its normal dividends of $5.5 million. At January 31, 1998 the Company had $23.3 million in cash and cash equivalents. During fiscal 1996, NCS generated $38.5 million of cash from operating activities and $64.1 million, net, from the sale of its Financial Systems business. The Company invested $14.9 million in property, plant and equipment and $11.2 million in acquisitions consisting of Macro and three additional smaller entities. The Company also repurchased 724,000 shares of Common Stock during fiscal 1996, using $8.1 million of cash. Other financing activities included the early repayment of the $15.0 million, 9.88% Secured Notes and $7.0 million of convertible debentures issued in connection with the Macro acquisition. The Company had long-term debt balances, including current maturities, of $18.8 million, $20.1 million and $27.0 million at January 31, 1998, 1997, and 1996, respectively. The items causing the changes in debt balances are described above. At January 31, 1998, the Company's debt to total capital ratio was 8.9% compared to 10.6% a year earlier and 17.4% two years earlier. The Company believes that the current debt to total capital ratio is at a level which will allow the Company significant flexibility to fund future growth initiatives. Accounts receivable, goodwill, accounts payable, accrued expenses and deferred income were impacted by the acquisitions made in 1997 and by the increased level of operations during the year. Looking toward fiscal 1998, the Company maintains a $50.0 million revolving credit facility, all of which was available at January 31, 1998. The Company expects its cash flows from operations, the revolving credit facility and cash on hand to be adequate to meet foreseeable cash requirements, including internal growth and potential acquisitions. NEW ACCOUNTING STANDARDS Certain accounting standards have been issued which the Company is not yet required to adopt. See Notes to Consolidated Financial Statements for a discussion of the applicable standards. The statements which are not historical or current facts or are "goals" or "expectations" contained in this annual report constitute `forward looking' statements, as defined in the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. The cautionary statements filed by the Company as Exhibit 99 to a filing made with the SEC on Form 10-K for the fiscal year ended January 31, 1998, are incorporated herein by reference and investors are specifically referred to such cautionary statements for a discussion of factors which could affect the Company's operations and forward-looking statements contained herein. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31 (in thousands) 1998 1997 -------- -------- Assets Current Assets Cash and cash equivalents $ 23,267 $ 58,079 Receivables 101,334 79,056 Inventories 16,239 18,176 Prepaid expenses and other 6,562 5,526 -------- -------- Total Current Assets 147,402 160,837 -------- -------- Property, Plant and Equipment Land, buildings and improvements 57,281 51,741 Machinery and equipment 141,949 120,395 Accumulated depreciation (105,206) (92,722) -------- -------- 94,024 79,414 -------- -------- Intellectual Properties, net Acquired and internally developed software products 14,967 17,578 Assessment instruments 10,317 2,340 -------- -------- 25,284 19,918 -------- -------- Other Assets, net Goodwill 45,634 7,556 Other assets 3,070 6,195 -------- -------- 48,704 13,751 -------- -------- Total Assets $315,414 $273,920 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31 (in thousands) 1998 1997 -------- -------- Liabilities and Stockholders' Equity Current Liabilities Current maturities of long-term debt $ 6,448 $ 3,819 Accounts payable 26,767 20,886 Accrued expenses 36,237 28,832 Deferred income 29,026 23,079 Income taxes 4,156 5,556 -------- -------- Total Current Liabilities 102,634 82,172 -------- -------- Long-Term Debt - less current maturities 12,396 16,329 Deferred Income Taxes 6,390 5,385 Commitments and Contingencies - - Stockholders' Equity Preferred stock - - Common stock - issued and outstanding - 30,846 and 30,469 shares, respectively 925 914 Paid-in capital 4,518 - Retained earnings 192,005 173,107 Deferred compensation (3,454) (3,987) -------- -------- Total Stockholders' Equity 193,994 170,034 -------- -------- Total Liabilities and Stockholders' Equity $315,414 $273,920 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year (in thousands, except per share amounts) 1997 1996 1995 -------- -------- -------- Revenues Information services $195,793 $157,511 $130,432 Product sales 161,977 134,144 130,648 Maintenance and support 48,245 39,504 39,803 -------- -------- -------- Total revenues 406,015 331,159 300,883 Costs of Revenues Cost of information services 150,106 123,718 100,459 Cost of product sales 67,950 62,075 61,233 Cost of maintenance and support 33,521 26,608 27,453 -------- -------- -------- Gross profit 154,438 118,758 111,738 Operating Expenses Sales and marketing 56,675 41,258 38,544 Research and development 8,628 9,883 8,490 General and administrative 46,091 33,076 34,000 Acquisition related charges: Purchased research and development - 5,637 - Other - 2,258 - -------- -------- -------- Income from Operations 43,044 26,646 30,704 Interest expense 1,353 1,677 3,276 Other (income) expense, net (284) (1,564) (332) -------- -------- -------- Income from Continuing Operations Before Income Taxes 41,975 26,533 27,760 Income taxes 16,800 12,867 11,180 -------- -------- -------- Income from Continuing Operations 25,175 13,666 16,580 Income (loss) from discontinued operations, net of taxes of $(1,360) in 1996 and $3,570 in 1995 - (2,229) 5,679 Gain on disposition, net of taxes of $29,031 in 1996 - 38,143 - -------- -------- -------- Net Income $ 25,175 $ 49,580 $ 22,259 ======== ======== ======== Basic Earnings per share Continuing operations $ .83 $ .45 $ .54 Discontinued operations - (0.07) .19 Gain on disposition - 1.26 - -------- -------- -------- Net Income per share $ .83 $ 1.64 $ .73 ======== ======== ======== Average Shares Outstanding 30,391 30,257 30,565 Diluted Earnings per share Continuing operations $ .80 $ .44 $ .53 Discontinued operations - (0.07) .18 Gain on disposition - 1.22 - -------- -------- -------- Net Income per share $ .80 $ 1.59 $ .71 ======== ======== ======== Average Shares Outstanding and Dilutive Potential Common Shares 31,864 31,069 31,319
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock --------------- Paid-In Retained Deferred (in thousands, except per share amounts) Shares Amount Capital Earnings Compensation Total ------ ------ ------- -------- ------------ ----------- Balance, January 31, 1995 30,621 $ 919 $ 3,335 $114,546 $(5,677) $113,123 Shares issued for employee stock purchase and option plans 413 12 2,440 - - 2,452 Repurchase of common stock (466) (14) (4,438) - - (4,452) Restricted stock awards 161 5 1,574 - (1,579) - Shares issued for business acquisition - - 55 - - 55 ESOP debt payment - - - - 1,000 1,000 Restricted stock compensation accrual - - - - 559 559 Net income - - - 22,259 - 22,259 Cash dividends paid - $.18 per share - - - (5,570) - (5,570) Foreign currency translation adjustment - - - (1,228) - (1,228) ------ ----- ------- -------- ------- -------- Balance, January 31, 1996 30,729 922 2,966 130,007 (5,697) 128,198 Shares issued for employee stock purchase and option plans 490 15 3,475 - - 3,490 Repurchase of common stock (724) (22) (6,860) (1,194) - (8,076) Restricted stock awards (forfeitures), net (26) (1) 25 - (24) - ESOP debt payment - - - - 1,000 1,000 Restricted stock compensation accrual - - 394 - 734 1,128 Net income - - - 49,580 - 49,580 Cash dividends paid - $.18 per share - - - (5,521) - (5,521) Foreign currency translation adjustment - - - 235 - 235 ------ ----- ------- -------- ------- -------- Balance, January 31, 1997 30,469 914 - 173,107 (3,987) 170,034 Shares issued for employee stock purchase and option plans 283 8 1,725 - - 1,733 Repurchase of common stock (1,082) (32) (13,467) - - (13,499) Restricted stock awards 91 3 1,758 - (1,761) - Shares issued for business acquisition 1,085 32 13,534 - - 13,566 ESOP debt payment - - - - 1,000 1,000 Restricted stock compensation accrual - - - - 1,294 1,294 Net income - - - 25,175 - 25,175 Cash dividends paid - $.18 per share - - - (5,512) - (5,512) Foreign currency translation adjustment and other - - 968 (765) - 203 ------ ----- ------- -------- ------- -------- Balance, January 31, 1998 30,846 $ 925 $ 4,518 $192,005 $(3,454) $193,994 ====== ===== ======= ======== ======= ========
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (in thousands) 1997 1996 1995 ------- ------- ------- Operating Activities Net income $25,175 $49,580 $22,259 Less - gain on disposition - (38,143) - Adjustments to reconcile to net cash provided by operating activities: Depreciation 16,825 15,620 15,643 Amortization 13,291 9,647 11,791 Deferred income taxes and other (661) (2,053) 3,747 Non-cash charges - 6,637 - Changes in operating assets and liabilities (net of acquired amounts): Accounts receivable (15,361) (4,318) (2,133) Inventory and other current assets 1,712 2,495 542 Accounts payable and accrued expenses 8,087 (3,856) 272 Deferred income 424 2,912 (190) ------- ------- ------- Net Cash Provided By Operating Activities 49,492 38,521 51,931 ------- ------- ------- Investing Activities Acquisitions, net of cash acquired (35,216) (11,192) - Purchases of property, plant and equipment (25,174) (14,909) (14,091) Purchases of business systems (7,108) (1,048) (1,897) Capitalized software products - (1,553) (4,826) Net proceeds from disposition - 64,071 - Other - net 1,148 3,296 1,342 ------- ------- ------- Net Cash Provided By (Used In) Investing Activities (66,350) 38,665 (19,472) ------- ------- ------- Financing Activities Decrease in revolving credit borrowing - - (13,065) Repayment of secured notes - (15,000) - Net increase (decrease) in other borrowings (676) 846 (7,920) Repurchase of common stock, net (11,766) (4,586) (1,945) Dividends paid (5,512) (5,521) (5,570) ------- ------- ------- Net Cash Used In Financing Activities (17,954) (24,261) (28,500) ------- ------- ------- Increase (Decrease) In Cash and Cash Equivalents (34,812) 52,925 3,959 Cash and Cash Equivalents - Beginning of Year 58,079 5,154 1,195 ------- ------- ------- Cash and Cash Equivalents - End of Year $23,267 $58,079 $ 5,154 ======= ======= =======
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE 1 - ACCOUNTING POLICIES The fiscal years referenced herein are as follows: Fiscal Year Year Ended ----------- ---------- 1997 January 31, 1998 1996 January 31, 1997 1995 January 31, 1996 PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions between consolidated entities have been eliminated. Certain reclassifications have been made to prior year presentations to conform to current year presentation. USE OF ESTIMATES: The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles which require management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Those assumptions and estimates are subject to constant revision, and actual results could differ from those estimates. CASH AND EQUIVALENTS: All investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are available for sale, are carried at cost which approximates fair market value and consist principally of corporate commercial paper. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. Components of inventory as of January 31, are summarized as follows: 1998 1997 - ---------------------------------------------------------------- Finished goods $ 5,166 $ 4,765 Scoring services and work in process 8,218 9,221 Raw materials and purchased parts 2,855 4,190 - ---------------------------------------------------------------- $16,239 $18,176 ================================================================ PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from two to forty years, using principally the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Significant improvements are capitalized to property, plant and equipment accounts, while maintenance and repairs are expensed currently. Rental income from equipment held for lease is recognized as earned using the operating method of accounting for such leases. ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product amounts originate from the allocation of purchase prices of acquired companies and direct acquisition of software, or rights to software. These products are generally large, complex, mission-critical application software packages with established market positions. Products in this category are generally assigned lives of five to ten years. Internally developed software products represent costs capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. Accordingly, software production costs incurred subsequent to establishing technological feasibility, as defined, are capitalized. Amortization of these products is computed on a product by product basis ratably as a percentage of estimated revenue, subject to minimum straight-line amortization over the products' estimated useful lives of five years or less. Expected revenues and useful lives are estimates which are subject to changes in technology and marketplace requirements and are, therefore, subject to revision. The Company periodically evaluates its software products for impairment by comparison of the carrying value of the product against anticipated product margins. The carrying value is adjusted, if necessary. A summary of software activity is as follows: Internally Accumulated Acquired Developed Amortization Total - ---------------------------------------------------------------------------- Balance, January 31, 1995 $10,475 $18,520 $(11,580) $17,415 Additions - 320 - 320 Product Discontinuation (151) (308) 459 - Amortization - - (6,068) (6,068) - ---------------------------------------------------------------------------- Balance, January 31, 1996 10,324 18,532 (17,189) 11,667 Additions 13,000 - - 13,000 Write-downs and dispositions - (6,539) 4,517 (2,022) Amortization - - (5,067) (5,067) - ---------------------------------------------------------------------------- Balance, January 31, 1997 23,324 11,993 (17,739) 17,578 Additions 1,010 - - 1,010 Amortization - - (3,621) (3,621) - ---------------------------------------------------------------------------- Balance, January 31, 1998 24,334 11,993 Accumulated Amortization (10,768) (10,592) $(21,360) - ---------------------------------------------------------------------------- Net Balance, January 31, 1998 $13,566 $ 1,401 $14,967 ============================================================================ ASSESSMENT INSTRUMENTS: These amounts originate from the allocation of purchase prices of acquired companies and direct acquisition of assessment instruments. These products gain prominence over time and generally have relatively long market lives once established. Products in this category are assigned amortizable lives of ten years or less. Expected revenues and amortizable lives are subject to revision and balances are periodically evaluated for possible impairment. Accumulated amortization at January 31, 1998 and 1997 was $3,849 and $2,754, respectively. GOODWILL: Goodwill arising from business acquisitions is amortized on a straight-line basis over periods ranging from five to twenty years, generally ten years. Amortization expense was $3,047, $703 and $624 in fiscal 1997, 1996 and 1995, respectively. Accumulated amortization was $7,130 and $3,843 as of January 31, 1998 and 1997, respectively. The Company periodically evaluates its goodwill for impairment by comparison of the carrying value against anticipated business performance. ACCRUED EXPENSES: Major components of accrued expenses consisted of the following as of January 31: 1998 1997 - ------------------------------------------------ Employee compensation $17,604 $13,376 Taxes other than income 3,558 2,875 Royalties 2,630 2,065 Other 12,445 10,516 - ------------------------------------------------ $36,237 $28,832 ================================================ REVENUE RECOGNITION: Revenue from product sales and software licensing is recognized at the time of shipment, except in instances where material fulfillment obligations exist beyond shipment. In such cases, revenue is not recognized until such obligations are substantially fulfilled or is recognized in accordance with specific contract terms. Revenue from information services is recognized when such service is performed. Hardware maintenance and software support revenues are recognized ratably over the contractual period. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which requires that each element of a software licensing arrangement be separately identified and accounted for based on the relative fair values of each element. The SOP is effective for transactions that the Company will enter into beginning February 1, 1998 and, based upon current revenue recognition policies, management believes that the effect of the adoption will not be material. PER SHARE DATA: In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS 128 requirements. The following table is a reconciliation of the earnings numerator and the weighted-average shares denominator used in the calculations of basic and diluted earnings per share for the last three fiscal years: 1997 1996 1995 ------- -------- ------- Earnings: Income from Continuing Operations - Basic earnings per share $25,175 $13,666 $16,580 Adjustments for dilutive securities: Interest expense on convertible debentures, net of tax 256 7 - ------- ------- ------- Adjusted income for diluted earnings per share $25,431 $13,673 $16,580 ======= ======= ======= Weighted Average Shares: Basic weighted-average shares 30,391 30,257 30,565 Adjustments for dilutive securities: Employee stock options, net of tax proceeds 620 402 382 Contingent stock awards, net of tax proceeds 270 394 372 Convertible debentures 583 16 - ------- ------- ------- Dilutive potential common shares 1,473 812 754 ------- ------- ------- Diluted weighted-average shares 31,864 31,069 31,319 ======= ======= ======= Basic earnings per share $ 0.83 $ 0.45 $ 0.54 ======= ======= ======= Diluted earnings per share $ 0.80 $ 0.44 $ 0.53 ======= ======= ======= IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates its long-lived assets for impairment losses when indicators of impairment are present by comparing the undiscounted cash flows to the assets' carrying amount. An impairment loss is recorded if necessary. STOCK-BASED COMPENSATION: In October, 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. The statement requires adoption of the new standard or footnote disclosure for all transactions entered into during the fiscal year ending January 31, 1996 and thereafter. As permitted by the statement, the Company has elected to continue to account for stock options and awards to employees under the provisions of Accounting Principles Board (APB) Opinion No. 25 and disclose the impact of SFAS No. 123, as if adopted, in Note 7. SEGMENT DISCLOSURES: In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which requires disclosure of certain information of a company's internal operating segments. This Statement is effective for the Company's fiscal 1998 yearend, and will have no effect on its basic financial statements, but will require additional disclosures. COMMON STOCK SPLIT: On March 3, 1998, the Board of Directors declared a two-for-one stock split of the Company's Common Stock. The stock split is in the form of a 100 percent stock dividend payable March 26, 1998 to shareholders of record on March 16, 1998. The number of shares issued and outstanding at January 31, 1998, after giving retroactive effect to the split was 30,846,000. All share and per share information, including stock option, stock purchase and stock ownership plan information, has been restated for all years presented to reflect the split. NOTE 2 - ACQUISITIONS During fiscal 1997, the Company made several individually small acquisitions. In April 1997, the Company acquired all of the common and preferred stock of Virtual University Enterprises (VUE), an electronic course registration and training administration company. The purchase price was approximately $14.6 million and consisted of stock of the Company (1,085,264 shares at $12.50 per share) and cash. In accordance with SFAS No. 109, Accounting for Income Taxes, the purchase price has been adjusted by $1.7 million to reflect deferred taxes on the intangible assets, whose amortization will be nondeductible. The excess purchase price, as adjusted for deferred taxes, over book value of the net assets acquired was $16.4 million, of all of which was allocated to goodwill and is being amortized over 20 years. In July 1997, the Company acquired the assets of two businesses from The McGraw-Hill Companies for $29.5 million in cash. The acquisition included London House, a pre-employment assessment business, and McGraw Hill School Systems, a school administrative software business. The purchase price was allocated primarily to goodwill, $20.4 million, and assessment instruments, $9.1 million, which are being amortized over 10 years. The Company made two additional acquisitions in fiscal 1997 whose acquisition prices totaled $5.0 million, of which $4.2 million was allocated to goodwill. All of the fiscal 1997 acquisitions described above were accounted for as purchases and, accordingly, operating results of these businesses subsequent to the date of acquisition were included in the Company's consolidated financial statements. The following is a summary of pro forma operating results as if the acquisitions had taken place at the beginning of fiscal 1996: Fiscal Year (unaudited) 1997 1996 -------- -------- Total revenues $420,843 $384,923 Income from continuing operations before income taxes 39,497 18,158 Income from continuing operations 23,698 8,641 Basic earnings per share $ 0.78 $ 0.29 Diluted earnings per share $ 0.75 $ 0.28 The pro forma information is provided for informational purposes only. It is based on historical information and does not purport to be indicative of the results that would have occurred had the acquisitions been made at the beginning of fiscal 1996,or of future results, as significant changes to their operations, products and cost and expense structures have taken place since acquisition. On January 21, 1997, the Company acquired all of the common stock of Macro Educational Systems, Inc. (Macro), a California-based developer of administrative software for the K-12 educational market, for approximately $13.9 million, through the issuance of $7.0 million of convertible debentures and cash. Additional payments up to $6.0 million may be earned between 1998 and 2001, subject to achieving certain earnings levels. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's consolidated financial statements. In accordance with SFAS No. 109, Accounting for Income Taxes, the purchase price has been adjusted by $6.0 million to reflect deferred taxes on the intangible assets, whose amortization will be nondeductible. The excess purchase price, as adjusted for deferred taxes, over book value of the net assets acquired was $22.4 million, of which $13.0 million was allocated to acquired software, $5.6 million to purchased in-process research and development and $3.8 million to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other intangible assets are being amortized over 10 years. In connection with the acquisition, the Company recorded a $2.3 million pre-tax charge related to impairments and redundancies in the Company's existing administrative software business. This included a $1.0 million non-cash charge to write-down software assets and $1.3 million to cover other costs directly related to the merger of the two operations. The Company made three additional acquisitions in fiscal 1996, whose acquisition prices totaled $5.1 million, of which $1.9 million was allocated to goodwill. NOTE 3 - DISCONTINUED OPERATIONS The Company sold its Financial Systems segment on July 10, 1996 to SunGard Data Systems, Inc. for $95.0 million in cash. The gain on the sale, recorded in the second quarter 1996, was $38.1 million net of tax. The results of the Financial Systems segment up to disposition have been classified as discontinued operations in the accompanying financial statements. The segment's 1996 revenues through the date of sale were $17.1 million and revenues for fiscal 1995 were $58.1 million. NOTE 4 - LEASES The Company leases office facilities under noncancelable operating leases which expire in various years through 2003. Rental expense for all operating leases was $9,167 in fiscal 1997, $8,544 in fiscal 1996, and $7,987 in fiscal 1995. Future minimum rental expense as of January 31, 1998, for noncancelable operating leases with initial or remaining terms in excess of one year is $17,262 and is payable as follows: fiscal 1998 - $5,979; fiscal 1999 - $4,327; fiscal 2000 - $3,315; fiscal 2001 - $2,530; fiscal 2002 - $1,040 and $71 beyond. In August 1997, the Company entered into a five-year operating lease agreement for a facility in Cedar Rapids, Iowa. The total cost of the assets covered by the lease as of January 31, 1998 was $11,751. The lease provides for a substantial residual value guarantee by the Company at the end of the initial term and includes purchase and renewal options at fair market values. The amounts of future minimum operating lease payments listed above excludes any payment related to the residual value guarantee which is due upon termination of the lease. The Company has the right to exercise a purchase option with respect to the leased building or the building can be sold to a third party. The Company expects the fair market value of the building, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual value guarantee. The Company is obligated to pay the difference between the maximum amount of the residual value guarantee and the fair market value of the building at the termination of the lease. At January 31, 1998 the maximum amount of the residual value guarantee relative to the assets under lease at January 31, 1998 is approximately $9,871. NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt at January 31, consisted of the following: 1998 1997 - -------------------------------------------------- Revolving credit borrowing $ - $ - Convertible debentures 7,000 7,000 Unsecured note 5,228 6,535 ESOP borrowing 2,000 3,000 Other borrowings, principally foreign 4,616 3,613 - -------------------------------------------------- 18,844 20,148 Less current maturities (6,448) (3,819) - -------------------------------------------------- Long-term debt $12,396 $16,329 ================================================== Revolving Credit Borrowings: The Company has a $50,000 unsecured revolving credit facility that terminates November 1, 2002. Interest on debt outstanding under this facility is computed, at the Company's discretion, based on the prime rate or the London Interbank Offered Rate (LIBOR). The Company pays a fee at an annual rate of .15% on the facility amount. The credit facility contains covenants with which the Company is in compliance. Convertible Debentures: In January 1997, the Company issued $7,000 of Convertible Debentures as partial consideration for the stock purchase of Macro, see Note 2. These debentures are due in five equal annual installments, with the first installment due on February 21, 1998. These debentures carry an interest rate of 6.1%, and are convertible into common stock at $12.00 per share. Unsecured Note: This unsecured term note is due in April 2001. The note has annual principal payments of $1,307, and bears interest at .95% over LIBOR. ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and guaranteed by the Company, is due in May 1999. The loan has annual payments of $1,000, with an interest rate of .75% over LIBOR. Scheduled Maturities: The aggregate principal amounts of long-term debt scheduled for repayment in each of the five fiscal years 1998 through 2002 are $6,448, $4,611, $2,991, $2,789, and $0, respectively, with $2,005 due thereafter. In each fiscal year, interest paid approximates interest expense. NOTE 6 - INCOME TAXES The components of the provision for income taxes from continuing operations are as follows: Current ----------------------- Fiscal Year Federal State Foreign Deferred Total - ----------------------------------------------------------------- 1997 $14,540 $2,806 $1,300 $(1,846) $16,800 1996 16,197 1,320 864 (5,514) 12,867 1995 10,079 1,465 70 (434) 11,180 - ----------------------------------------------------------------- The provision for income taxes from discontinued operations is $27,671 and $3,570 in fiscal years 1996 and 1995, respectively. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of January 31, are as follows: 1998 1997 ------ ------ Deferred tax assets: Reserves for uncollectibles $2,561 $2,801 Foreign operating loss carryforwards 2,826 2,778 Accrued vacation pay 1,792 1,511 Rotable service parts amortization 980 1,260 Intangible amortization 1,453 1,198 Deferred expenses 783 689 Other 602 1,431 Valuation allowance (2,826) (2,778) - ------------------------------------------------------------ Total deferred tax assets 8,171 8,890 - ------------------------------------------------------------ Deferred tax liabilities: Acquired intangible amortization 7,688 6,592 Accelerated depreciation 4,542 5,197 Net capitalized software 1,921 1,929 Other 410 557 - ------------------------------------------------------------ Total deferred tax liabilities 14,561 14,275 - ------------------------------------------------------------ Net deferred tax liabilities $ 6,390 $ 5,385 ============================================================ A reconciliation of the Company's statutory and effective tax rate from continuing operations is presented below: 1997 1996 1995 ------ ------ ------ Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.4 3.2 3.1 Intangible amortization 1.0 1.7 1.0 Foreign sales corporation (0.2) (0.5) (0.1) Research and development credits (0.1) (0.6) (0.3) Affordable housing credit (0.6) (1.0) (1.0) Foreign operating losses 1.1 3.2 3.2 Purchased research and development - 7.4 - Other (0.6) 0.1 (0.6) - --------------------------------------------------------------- Effective rate 40.0% 48.5% 40.3% =============================================================== The Company made income tax payments of $18,991, $47,693 and $10,335 in the fiscal years 1997, 1996, and 1995, respectively. NOTE 7 - STOCKHOLDERS' EQUITY The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized and issuable in one or more series as the Board of Directors may determine; none is outstanding. 100,000,000 shares of $.03 par value Common Stock are authorized (post-split). There are no restrictions on retained earnings. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company continues to elect to utilize APB Opinion No. 25 and related interpretations in accounting for its stock option plans, restricted stock plans and its employee stock purchase plan. If the Company had elected to recognize compensation cost based on the fair value of the options granted, restricted shares awarded and shares sold pursuant to the purchase plan as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below for the fiscal years 1997, 1996 and 1995: 1997 1996 1995 ------- ------- ------ Net income - as reported $25,175 $49,580 $22,259 Net income - pro forma 23,988 49,069 21,925 Earnings per share - as reported: Basic $ 0.83 $ 1.64 $ 0.73 Diluted 0.80 1.59 0.71 Earnings per share - pro forma: Basic $ 0.79 $ 1.62 $ 0.72 Diluted 0.76 1.58 0.70 SFAS No. 123 is applicable only to options granted after December 31, 1994; as a result, its pro forma effect will not be fully impacted until these options become fully exercisable. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for the fiscal years shown: 1997 1996 1995 ------ ------ ------ Expected dividend yield .58% .78% .78% Expected stock price volatility 30% 45% 45% Risk-free interest rate 6.23% 6.18% 6.18% Expected life of options 5 years 5 years 5 years The weighted-average fair value of the options granted during fiscal years 1997, 1996 and 1995 were $4.40, $5.16 and $4.20, respectively. The Company has five Employee Stock Option Plans (1984, 1986, 1990, 1995 and 1997). Options to purchase Common Stock of the Company are granted to employees at 100% of fair market value on the date of grant and are exercisable over a 60 or 63 month period. Shares available for grant under the Plans totaled 669,700, 454,000 and 760,500 at January 31, 1998, 1997 and 1996, respectively. Outstanding options under all plans, including non-qualified options discussed below, are summarized as follows: Weighted Average Price Shares Per Share ------- ------------- Balance, January 31, 1995 1,895,000 $ 6.85 Granted 459,500 9.26 Cancelled (131,900) 7.57 Exercised (328,700) 5.62 --------- ----- Balance, January 31, 1996 1,893,900 7.60 Granted 451,700 11.37 Cancelled (188,900) 8.27 Exercised (462,580) 7.43 --------- ----- Balance, January 31, 1997 1,694,120 8.57 Granted 862,148 13.13 Cancelled (92,908) 9.51 Exercised (309,246) 7.57 --------- ------ Balance, January 31, 1998 2,154,114 $10.50 ========= ====== Options for 679,182; 627,140 and 746,500 shares were exercisable at January 31, 1998, 1997 and 1996, with weighted average exercise prices of $8.07, $7.43 and $7.24, respectively. Exercise prices for options outstanding as of January 31, 1998 are summarized as follows:
Options Outstanding Options Exercisable ----------------------------------------- ------------------------ Weighted Weighted Weighted Average Average Remaining Average Range of Number Exercise Contractual Number Exercise Exercise Prices of Shares Price Life of Shares Price - --------------- --------- --------- ----------------- ---------- --------- $ 4.02 - 8.00 647,334 $ 6.72 1.7 years 437,828 $ 6.78 8.38 -12.00 664,580 10.44 3.4 years 198,654 10.14 12.25 -18.75 842,200 13.52 5.1 years 42,700 12.99 --------- ------ ------- ------ 2,154,114 $10.50 679,182 $ 8.07 ========= ====== ======= ======
The Company has two Long-Term Incentive Plans (L-TIP) approved by the shareholders, (1990 and 1997). During fiscal 1990, pursuant to the 1990 L-TIP, 342,800 shares were issued to participants on a restricted basis. At January 31, 1998, 30,690 shares remained restricted, 83,210 shares distributed and the balance having been forfeited. The shares distributed and the remaining restricted shares which vest on January 31, 1999, contingent on continued employment, were earned by participants during fiscal 1996. During fiscal 1995 and 1996, pursuant to the 1990 L-TIP, 199,800 shares were issued to participants on a restricted basis; 129,828 shares have been earned and distributed with the balance having been forfeited. During fiscal 1997, pursuant to the 1990 L-TIP, 150,000 shares were issued on a restricted basis. At January 31, 1998, 93,750 shares remain restricted with the balance having been earned and distributed. The restricted shares are earned upon attainment of specified Common Stock market prices and are contingent on continued employment. During fiscal 1997, pursuant to the 1997 L-TIP, non-qualified options to purchase 336,000 shares of Common Stock of the Company were granted to participants at 100% of fair market value on date of grant and are exercisable over 67 to 72 month periods. Vesting can be accelerated to January 31, 2000 on achievement of specified cumulative earnings per share amounts during the three fiscal years then ended. At January 31, 1998, there were 336,000 options shares outstanding at a weighted average exercise price per share of $12.54. The Company has an Employee Stock Purchase Plan. There were 57,784 shares available for purchase under the Plan at January 31, 1998. NOTE 8 - EMPLOYEE BENEFIT PLANS EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan covering substantially all employees. Company contributions are discretionary. The Company's contributions to the Plan, representing 401(k) matching contributions only, were $2,195, $1,638 and $1,900 in fiscal years 1997, 1996 and 1995, respectively. EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Benefits, to the extent vested, become available upon retirement or termination of employment. During 1989, the ESOP Trust borrowed $10,000 to purchase 1,584,000 shares of Common Stock. Each year, the Company makes contributions to the ESOP which are charged to compensation expense, and used by the ESOP Trust to make loan interest and principal payments. With each principal payment, a portion of the Common Stock is allocated to participating employees. In fiscal 1997, the Company's contribution to the Plan was $1,000 plus interest of $61, which is net of dividends on unallocated shares of $87. The Company's contribution to the Plan was $1,000 in fiscal 1996 and fiscal 1995, and interest, which was totally offset by dividends on unallocated shares, was $77 in fiscal 1996 and $63 in fiscal 1995. There were 316,800 and 475,200 unallocated shares at January 31, 1998 and 1997, respectively. The ESOP Trust borrowing, which is guaranteed by the Company, is reflected in long-term debt, and the Company's obligation to make future contributions to the ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in the consolidated financial statements. NOTE 9 - CONTINGENCY Certain claims asserted against the Company by a former customer and discussed in prior years were reduced to a formal complaint served on the Company on April 30, 1997. The lawsuit alleges certain claims against the Company in connection with three loan processing and servicing agreements; the claims are for expenses, an undisclosed amount of lost profits and damages associated with loan defaults. The Company has tendered the defense of this claim to its insurer, and the insurer accepted the defense subject to a reservation of rights. The Company has filed an answer to the complaint denying the claims and the Company will vigorously defend this litigation. In addition, the Company has filed a counterclaim against the former customer and its' corporate affiliate seeking compensatory damages in an amount to be determined at trial. The Company does not believe the outcome of this litigation would result in a material adverse effect on the Company's financial position or results of operations. NOTE 10 - BUSINESS SEGMENT INFORMATION The Company operates in a single business segment, providing software, services and systems for the collection, management and interpretation of data. The Company markets these products and services to the education, commercial and government markets, through its various units. The Company's foreign operations and export sales are individually less than 10% of total revenues. Sales to all government agencies for the fiscal years ended January 31, 1998, 1997 and 1996 were $185,186, $180,993 and $148,313 of which $63,005, $62,278, and $42,664, respectively, were to U.S. government agencies, principally the U.S. Department of Education, with the remainder to state and local government agencies, predominantly school districts and state departments of education. The Company considers its credit risk in trade receivables to be minimal with regard to the governmental customers described above. With regard to the Company's non-governmental customers, credit investigations are performed to minimize credit losses, which historically have been insignificant. REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of National Computer Systems, Inc. and subsidiaries as of January 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Computer Systems, Inc. and subsidiaries at January 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP Minneapolis, Minnesota March 2, 1998 EX-21 7 SIGNIFICANT SUBSIDIARIES EXHIBIT 21 SIGNIFICANT SUBSIDIARIES NATIONAL COMPUTER SYSTEMS, INC. STATE OR OTHER JURISDICTION OF NAME UNDER WHICH NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS - ------------------ ------------- ------------------------ Interpretive Scoring Minnesota National Computer Systems, Inc. Systems, Inc. NCS Assessments Professional Assessment Services Division of National Computer Systems, Inc. Macro Educational California National Computer Systems, Inc. Systems, Inc. Education Systems and Services Division of National Computer Systems, Inc. Note: No other subsidiary of National Computer Systems, Inc. meets the conditions to be deemed a significant subsidiary. EX-23 8 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of National Computer Systems, Inc. of our report dated March 2, 1998, included in the 1997 Annual Report to Stockholders of National Computer Systems, Inc. and subsidiaries. We also consent to the incorporation by reference in Post Effective Amendment Number 1 to Registration Statement Number 2-96965 on Form S-8 (1984 Employee Stock Option Plan), Registration Statement Number 33-9830 on Form S-3 (Selling Shareholder), Registration Statement Number 33-21511 on Form S-8 (1986 Employee Stock Option Plan), Registration Statement Number 333-00377 on Form S-8 (1989 Non-Employee Director Stock Option Plan), Registration Statements Number 33-48509 and 333-00381 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement Number 333-00379 on Form S-8 (1990 Long-Term Incentive Plan), Registration Statement Number 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan), Registration Statement Number 33-68854 on Form S-8 (option held by former director), Registration Statement Number 333-00383 on Form S-8 (1995 Employee Stock Option Plan), Registration Statement Number 333-25523 on Form S-3 (VUE Selling shareholders) and Registration Statement Number 333-25343 on Form S-8 (NCS/VUE Stock Option Plan) of our report dated March 2, 1998 with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) of National Computer Systems, Inc. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota April 22, 1998 EX-24 9 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY FORM 10-K FOR YEAR ENDED JANUARY 31, 1998 The undersigned directors and officers of NATIONAL COMPUTER SYSTEMS, INC. hereby constitute and appoint J. W. Fenton, Jr., their true and lawful attorney-in-fact and agent, for each of them and in their name, place and stead, in any and all capacities (including without limitation, as Director and/or principal Executive Officer, principal Financial Officer, principal Accounting Officer or any other officer of the Company), to sign its Annual Report on Form 10-K for the year ended January 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 3rd day of March, 1998. /s/ Russell A. Gullotti /s/ Stephen G. Shank - ------------------------- ------------------------- Russell A. Gullotti Stephen G. Shank /s/ David C. Cox /s/ John E. Steuri - ------------------------- ------------------------- David C. Cox John E. Steuri /s/ Jean B. Keffeler /s/ John W. Vessey - ------------------------- ------------------------- Jean B. Keffeler John W. Vessey /s/ Moses Joseph /s/ Jeffrey W. Taylor - ------------------------- ------------------------- Moses Joseph Jeffrey W. Taylor /s/ Charles W. Oswald - ------------------------- Charles W. Oswald EX-27.1 10 FDS
5 This schedule contains summary financial information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ended January 31, 1998, and is qualified in its entirety by reference to such financial statements. 0000069999 NATIONAL COMPUTER SYSTEMS, INC. 1,000 U.S. Dollars 12-MOS JAN-31-1998 FEB-01-1997 JAN-31-1998 1.0 23,267 0 102,334 0 16,239 148,402 199,230 (105,206) 315,414 102,634 12,396 0 0 925 193,069 315,414 161,977 406,015 67,950 251,577 111,394 0 1,353 41,975 16,800 25,175 0 0 0 25,175 0.83 0.80
EX-27.3 11 FDS
5 This schedule contains summary financial information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ended January 31, 1998, and is qualified in its entirety by reference to such financial statements. 0000069999 NATIONAL COMPUTER SYSTEMS, INC 1,000 U.S. Dollars 3-MOS 6-MOS 9-MOS JAN-31-1998 JAN-31-1998 JAN-31-1998 FEB-01-1997 MAY-01-1997 AUG-01-1997 APR-30-1997 JUL-31-1997 OCT-31-1997 1.0 1.0 1.0 27,436 8,518 22,084 0 0 0 79,321 91,753 80,854 0 0 0 23,149 21,950 21,844 135,688 128,107 131,986 168,618 173,907 176,862 (90,901) (94,637) (95,902) 267,231 291,377 295,812 71,830 89,651 89,546 14,974 14,163 13,954 0 0 0 0 0 0 918 920 922 172,619 179,975 184,745 267,231 291,377 295,812 34,037 38,857 45,846 78,971 96,029 115,387 15,235 17,804 18,256 48,160 57,962 74,644 23,511 26,194 30,736 0 0 0 325 310 330 6,748 11,611 10,126 2,700 4,600 4,100 4,048 7,011 6,026 0 0 0 0 0 0 0 0 0 4,048 7,011 6,026 0.13 0.23 0.20 0.13 0.22 0.19
EX-27.2 12 FDS
5 This schedule contains summary financial information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal years ended January 31, 1996 and 1997 and is qualified in its entirety by reference to such financial statements. 0000069999 NATIONAL COMPUTER SYSTEMS, INC. 1,000 U.S.Dollars 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS JAN-31-1996 JAN-31-1997 JAN-31-1997 JAN-31-1997 JAN-31-1997 FEB-01-1995 FEB-01-1996 FEB-01-1996 MAY-01-1996 AUG-01-1996 JAN-31-1996 JAN-31-1997 APR-30-1996 JUL-31-1996 OCT-31-1996 1.0 1.0 1.0 1.0 1.0 5,154 58,079 7,316 84,165 72,532 0 0 0 0 0 68,713 79,056 57,912 64,721 64,811 0 0 0 0 0 18,336 18,176 23,112 18,692 20,417 118,220 160,837 115,939 175,692 165,968 154,425 172,136 155,031 158,974 161,598 (79,596) (92,722) (81,286) (84,640) (86,501) 219,724 273,920 214,906 275,636 264,682 62,632 82,172 56,924 94,688 80,650 24,535 16,329 23,228 7,228 8,098 0 0 0 0 0 0 0 0 0 0 922 914 927 920 916 127,276 169,120 129,912 168,934 171,662 219,724 273,920 214,906 275,636 264,682 130,648 134,144 60,812 71,113 78,578 300,883 331,159 70,507 80,964 88,783 61,233 62,075 37,140 43,204 53,302 189,145 212,401 43,769 49,676 60,138 81,034 92,112 20,157 21,412 20,863 0 0 0 0 0 3,276 1,677 568 625 232 27,760 26,533 5,361 9,783 8,400 11,180 12,867 2,160 3,890 3,450 16,580 13,666 3,201 5,893 4,950 5,679 (2,229) (370) (1,859) 0 0 0 0 0 0 0 0 0 0 0 22,259 49,580 2,831 42,177 4,950 0.73 1.64 0.10 1.39 0.16 0.71 1.59 0.09 1.35 0.16
EX-99 13 CAUTIONARY STATEMENT Exhibit 99 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT National Computer Systems, Inc. (the "Company") desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is filing this Exhibit to its Annual Report on Form 10-K in order to do so. When used in this Annual Report on Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's annual report, quarterly reports and press releases and in oral statements made with the approval of an authorized executive officer, the words or phases `will likely result', `look for', `may result', `will continue', `is anticipated', `expectations', `project', `goals' or similar expressions are intended to identify `forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In addition, the Company cautions readers that the following important factors, among others, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any forward-looking statements made by, or on behalf of, the Company: Difficulties in obtaining and retaining sufficient numbers of adequately skilled technical employees to fulfill the Company's internal systems, product development and service delivery requirements, including, but not limited to, the Company's need to modify or replace software to properly function in the year 2000. Difficulties or delays in the development, production, testing and marketing of the Company's products, including, but not limited to, a failure to ship new products and technologies when anticipated, (e.g., school administrative software products or new data collections services and systems) or delays or failures of acquired businesses in meeting projected business cases. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of government agencies, particularly the U.S. Department of Education and local taxing authorities which fund education, and similar organizations; changes in social and economic conditions, such as trade restrictions or prohibitions, inflation and monetary fluctuations, import and other charges or taxes; the ability or inability of the Company to obtain, or hedge against, foreign currency, foreign exchange rates and fluctuations in those rates; unstable governments and legal systems, and intergovernmental disputes. Occurrences affecting the slope or speed of the life cycle curve for many of the Company's existing products, or affecting the Company's ability to reduce product and other costs, and to increase productivity. Difficulties in, and cost of, obtaining raw materials, supplies, electronic components and any other items needed for the production of the Company's scanning devices, scannable forms, and other products; and capacity constraints limiting the amounts of orders for these items causing effects on the Company's ability to ship its products. The costs and other effects of legal and administrative cases and proceedings; claims of customers, both current and former; settlements and investigations; and changes in those items; developments or assertions by or against the Company relating to intellectual property rights and licenses; adoption of new, or changes in, accounting policies and practices and the application of such policies and practices. The amount, and rate of growth in, the Company's selling, general and administrative expenses; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. The Company does NOT undertake and specifically declines any obligations to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----